* Schaeuble says wants deal on bank supervision by Christmas
* France, Germany advance towards compromise on scope of ECB
* Sweden's Borg warns banking union could split Europe
By John O'Donnell and Robin Emmott
BRUSSELS, Dec 12 European governments neared a
deal on Wednesday to give the European Central Bank new powers
to supervise banks across the bloc after Germany signalled a
readiness to compromise on the scope of the ambitious financial
Last week German Finance Minister Wolfgang Schaeuble had
clashed openly with his French counterpart Pierre Moscovici over
key elements of the plan, but with time running out to meet a
year-end deadline, they narrowed their differences, raising
hopes of a breakthrough.
Agreement on a common bank supervisor is a crucial first
step towards a broader "banking union", or common euro zone
approach to dealing with failing banks that in recent years have
dragged down countries like Ireland and Spain.
"We think that we have a good chance to reach a deal today,"
Schaeuble told journalists ahead of a meeting in Brussels with
his European Union peers. "My intention is that we find a
solution to the banking union on time before Christmas."
Moscovici told his colleagues in the meeting that "all the
parameters" for an agreement were in place.
Even if the bloc is able to settle most of its differences
on Wednesday, other difficult issues remain.
At a summit in June, EU leaders pledged that once a common
bank supervisor was in place, the bloc's rescue mechanism would
have the power to directly recapitalise struggling institutions.
Countries like France, Italy and Spain are keen for those
powers to be in place as soon as possible. But Germany, worried
it could be forced to foot the bill for struggling banks across
the bloc, is not in a rush.
In introductory remarks at the meeting, Schaeuble tried to
kill any discussion about bank recapitalisations and said it
could take more than a year for the new supervisor to be fully
up and running.
In the longer-term, there is disagreement over how the
burden of winding down failed banks should be shared.
A compromise document put forward by rotating EU President
Cyprus, and obtained by Reuters on Tuesday, won broad backing at
the meeting from the ECB and member states.
In recent weeks, Germany had argued against giving the ECB
supervisory responsibility for all 6,000 European banks,
concerned the new system could become unmanageable.
The new proposal recommends that banks with assets of 30
billion euros, or larger than one fifth of their country's
economic output, be supervised directly by the ECB rather than
Critically, it also gives the ECB authority to widen its
remit to smaller banks if problems arise.
Berlin remains worried about a potential conflict of
interest between the ECB's roles as supervisor and as guardian
of monetary policy. Such a conflict could arise if, for example,
the ECB were to keep interest rates low to prop up banks.
But the tone of Wednesday's gathering was a far cry from a
meeting last week intended to finalise the plan when Schaeuble
clashed with Moscovici. France wanted a broad ECB remit, while
Germany had reservations.
Schaeuble had objected to the ECB's Governing Council having
the final say over monitoring banks, but said at the meeting on
Wednesday that he thought a compromise could be found.
Reaching a deal, which EU leaders hope to sign off at a
summit on Thursday and Friday, will also require the backing of
others with vested interests such as Britain, Sweden, Poland,
Hungary and the Netherlands.
Sweden's Finance Minister Anders Borg spelled out his
objections to peers, saying there was no way for non-euro
countries to participate in the ECB-led scheme on an equal
footing with countries in the currency.
He said that Sweden was unlikely to join but could allow the
banking union go ahead for others, although he warned it could
create "substantial division" in the European union.
Britain has similar worries, although its finance minister
signalled at the meeting that a deal was possible.
George Osborne said one of his main concerns was avoiding a
situation where the ECB might infringe on Britain's autonomy in
monitoring the City of London, Europe's biggest financial
"It would be very difficult for us to accept that the ECB
could exercise certain powers for Deutsche Bank in London. That
would be an unfair arrangement," Osborne said.
All 27 EU states must give approval for the project to go
ahead, even if only those countries in the euro zone will fall
under the banking union to begin with.
Under the Cypriot proposal, the ECB's Governing Council
would keep the final say in supervision, but it also lays
emphasis on the need for a clear operational separation between
monetary policy and supervision. In a nod to Germany, it says
the new supervisor may not be fully operational until April,