UPDATE 1-Spain, Portugal push for full banking union as Germany finds hurdles
* Spain's Rajoy says banking union is credibility test for European Union
* Germany proposes two steps towards banking union
* Some see German demand as tactics to delay debate until after elections
BRUSSELS/MADRID May 13 (Reuters) - Spain and Portugal called on Monday for the euro zone to complete a banking union as Germany underscored legal hurdles before a central element of the plan to deal with failing banks can be introduced.
"It is indispensable that we stick to the agreed calendar on banking union and that we take steps to make sure families and small companies receive credit," Spanish Prime Minister Mariano Rajoy told reporters.
"Banking union is the credibility test of the European Union," he said, after meeting Portuguese Prime Minister Pedro Passos Coelho, who backed his calls for progress on Europe's most ambitious reform of the financial crisis.
The call came as finance ministers from the euro zone met in Brussels, ahead of which German Finance Minister Wolfgang Schaeuble reiterated the need for a change to EU treaties to underpin the new system of bank resolution.
"When a bank is wound up, money and jobs are usually lost. Those affected will seek redress. If there is an activity that needs a solid legal base, it is resolution," he wrote in an article in the Financial Times on Monday.
To avoid treaty change and have a banking union "of sorts" Schaeuble proposed to stick for now to the intermediate stage of a coordinated network of national resolution authorities, rather than a new EU resolution authority.
"This would be a timber-framed, not a steel-framed, banking union," Schaeuble wrote.
Most euro zone countries and institutions believe a full banking union, which would help deal with banking crises, is needed urgently to restore investor confidence.
Under the plan, the biggest banks will be supervised by the European Central Bank from the middle of next year. There is also to be a single bank resolution mechanism that would wind down insolvent banks. Plans for a common deposit guarantee scheme are unlikely to happen any time soon.
But while the ECB bank supervision looks set to take effect as planned, the single authority that would order and finance the closure of a bank is unlikely to materialise soon, because Germany believes it needs a change to the EU treaty.
Some were sympathetic to this message. "Many of the building blocks for the banking union can be put in place. The issue of the treaty change can be addressed later on," Jeroen Dijsselbloem, the Eurogroup chairman, told reporters before the ministerial meeting.
"I think the Germans are putting forward understandable questions, which will have to be dealt with. But I don't see why that should stop us making progress on banking union," he said.
But the issue is divisive because a change to the European Union treaty could take years and entails risks - the revised law could be rejected in one of the 27 national EU parliaments during ratification.
Some policy-makers believe Germany is demanding treaty change to push the discussion on bank resolution back until after its parliamentary elections in September, in which Chancellor Angela Merkel will have to deal with rising popular discontent with bailing out euro zone banks and governments.
"You do not need treaty change for banking resolution, it can be done under the existing rules," one EU diplomat said. "Germany is erecting barriers to slow down the process, but that is a political decision, not a technical one."
France too called for rapid progress. "We need to go fast, as fast as possible, and have a global banking union," French Finance Minister Pierre Moscovici told reporters before the euro zone finance ministers meeting.
"Mr. Schaeuble says we need to go as far as possible with the existing treaty, and if there are problems in order to change the treaties, we'll see. I do agree with that with maybe a little nuance that I believe that we can go very very far with the existing treaty and maybe, a second thing, I am convinced that we need an integrated authority," Moscovici said.