UPDATE 3-German finance minister softens stance on EU bank union
* Schaeuble says banking union "a priority project"
* France welcomes comments, stresses urgency of plans
* Central banks warn against harming German competitiveness
BERLIN, May 7 (Reuters) - German Finance Minister Wolfgang Schaeuble signalled a softer stance on European banking union on Tuesday, saying that rather than waiting for a treaty change, governments should coordinate policies on closing banks.
A banking union is critical to Europe's efforts to overcome the euro zone's sovereign debt crisis. A first step involves creating a Europe-wide banking supervisor under the European Central Bank, to be followed by a scheme for bank resolution - closing or salvaging struggling banks.
Just last month in Dublin, Schaeuble appeared to slam on the brakes by saying the EU needed to consider treaty change due to the "doubtful legal basis" on which this project rested. That sparked a backlash from EU officials and partners like France.
But Schaeuble struck a more conciliatory tone on Tuesday, saying at a joint event in Berlin with his French counterpart Pierre Moscovici that banking union was a "priority project" and promising to press ahead with it "quickly".
Banking union could move ahead for now by harmonising national resolution schemes, he said.
"We must make the best of it on the basis of the current treaties, and where we do not manage to achieve things institutionally, then we will work inter-governmentally or even bilaterally," he said at the Berlin university event.
A German finance ministry official said Schaeuble's "ideal scenario" was to get agreement on banking resolution before the European summer recess, adding that without a new EU treaty providing legal backing for a common resolution authority, "you can work with a network of national authorities".
That chimed with Moscovici's comments at a news conference later in Berlin that the EU should aim to make "decisive progress" by the end of June on the banking union.
French President Francois Hollande welcomed Schaeuble's comments, saying: "It is absolutely essential that we can have the banking union without changing treaties - that has always been France's position."
International Monetary Fund chief Christine Lagarde emphasised the need for broad agreement, telling students in Amsterdam: "You need to have all the players at the table."
FRANCE URGES FLEXIBILITY
Germany, which holds an election in September, has previously emphasised caution and careful preparation in the drive for a banking union, fearing its citizens might wind up picking up much of the liabilities.
German Chancellor Angela Merkel has insisted on austerity measures to cut the euro zone's public debt and overcome the crisis, but Moscovici urged Berlin to show more understanding for the plight of struggling southern countries.
"It is true that Germany is very attached traditionally to rules and discipline, which are things we need - but at the same time we have to be capable of flexibility, of understanding and of respecting our diversity," the French Socialist said.
Last week, the Commission, the EU's executive body, granted France - the euro zone's second largest economy - two more years to cut its public deficit to below three percent of gross domestic product (GDP).
Unlike Germany, where the economy remains relatively robust and unemployment is near two-decade lows, France has record jobless numbers.
Moscovici said countries had to reduce their public debt but at an appropriate pace. "We will continue our efforts to tackle the structural (budget) deficit," he said. "France is a serious country conducting a credible policy, we do not renounce (fiscal responsibility)."
Some experts have also suggested higher German wages would encourage workers to spend more on goods and services in other euro countries, but the heads of both the German and French central banks cautioned against any steps that might undermine German competitiveness.
"Weakening Germany would just weaken the whole euro zone," Bundesbank chief Jens Weidmann told the news conference with Schaeuble, Moscovici and French central banker Christian Noyer.
Echoing his comment, Noyer said: "The issue is not, and cannot be, about reducing Germany's performance and its export capacity. It is about raising the euro zone's overall performance ... It clearly requires competitiveness reforms in all countries."