Van Rompuy charts path to closer integration

BRUSSELS Thu Dec 6, 2012 4:45am EST

BRUSSELS (Reuters) - The European Central Bank should have full responsibility for overseeing euro zone banks by the start of 2014, a report prepared for EU leaders said on Thursday, indicating that creating a "banking union" will take longer than expected.

The 15-page report setting out the future of economic and monetary union also said a framework for allowing the direct recapitalization of troubled banks from the euro zone's rescue fund should be finalized by the end of March next year.

And it recommended that after 2014 the 17 euro zone countries should have set up an independent "fiscal capacity" that could be tapped to help states absorb one-off economic shocks, as long as they are also meeting their economic targets.

Such a "fiscal capacity" could provide the basis for common debt issuance among the euro zone countries, although that would not necessarily mean a mutualisation of all euro zone debt, something that Germany firmly opposes.

"In a longer term perspective, a key aspect of a future fiscal capacity, which would need to be examined carefully, would be its possible ability to borrow," it said.

"A euro area fiscal capacity could indeed offer an appropriate basis for common debt issuance without resorting to the mutualisation of sovereign debt."

The report, drafted by Herman Van Rompuy, the president of the European Council and the chair of EU summits, charts a path towards closer fiscal integration in the euro zone so as to bolster the currency bloc against its debt and economic crisis.

Van Rompuy will discuss the report with EU leaders at a summit on December 13-14.

The first step towards a stand-alone euro zone fiscal resource begins, however, with a new system to supervise banks and shutdown or wind-up struggling banks, involving the imposition of losses on private investors.

When a single supervisory mechanism attached to the ECB is in place, it would pave the way for the euro zone's rescue fund, the European Stability Mechanism, to help troubled banks directly, rather than via their governments.

Direct recapitalization as part of a "banking union" would mark the first concerted attempt to integrate the bloc's response to banking and debt crisis, with risks effectively being pooled and shared across the single currency bloc.

But the plans have run into objections from Germany, which is concerned that it could morph into a scheme that sees strong countries stepping in to help the banks of weaker states such as Spain - with Germany ultimately footing the bill.

"It will be crucial that the ECB is equipped with a strong supervisory toolkit, and that the ECB's ultimate responsibility for banking supervision is coupled with adequate control powers," the report said.

The document was prepared in conjunction with European Commission president Jose Manuel Barroso, the president of the European Central Bank, Mario Draghi, and Jean-Claude Juncker, president of the Eurogroup of finance ministers.

(Reporting By Luke Baker and John O'Donnell)