* Report drafted over past 6 months by European Council
* Document sets out three phases for overhauling monetary
* Aim is to finalise banking union in 2014
* Report proposes separate fund for "one-off" economic
(Adds details, quotes throughout)
By Luke Baker and John O'Donnell
BRUSSELS, Dec 6 European Union leaders will
examine a detailed plan for completing a banking union and
strengthening euro zone fiscal policy next week, with officials
concerned that momentum is waning in tackling the debt crisis.
In a report prepared for a Dec. 13-14 EU summit,
policymakers have set out a three-step process they hope will
strengthen economic and monetary union and help prevent a repeat
of the problems that have threatened the survival of the euro.
The 15-page report, overseen by Herman Van Rompuy, the
president of the European Council and the chair of EU summits,
is the culmination of six months of drafting and responds to a
request made by heads of state and government in June.
The paper, put together with the European Commission, the
European Central Bank and euro zone finance ministers, lays out
the steps required to complete a banking union and proposes
creating a stand-alone budget, financed by euro zone countries,
that would be used to handle one-off shocks to their economies.
"A more resilient and integrated economic and monetary union
would buffer euro area countries against external economic
shocks," said the report, unveiled on Thursday.
"The urgency to act stems from the magnitude of the internal
and external challenges currently faced by the euro area and its
Efforts to establish a banking union -- a three-part process
which involves creating a single supervisor for all the euro
zone's banks, establishing a fund to wind down problem banks and
fully coordinating national schemes that guarantee deposits --
are underway but there are already hiccups.
The first step -- the single supervisory mechanism under the
European Central Bank -- was due to be completed by the end of
the year, but EU finance ministers cannot agree how the
mechanism should be structured and how much power the ECB should
have, particularly if it conflict with its monetary policy aims.
They are due to meet again on Dec. 12, the day before the
summit, to try to reach agreement before EU leaders gather,
although it appears unlikely that they will reach a definitive
deal until early 2013, partly because of German concerns.
Once the legalities are worked out, the ECB is expected to
steadily take over responsibility for overseeing all 6,000 euro
zone banks, although it will take up to a year before that
process is complete. In his report, Van Rompuy said full ECB
oversight should be in place by Jan. 1, 2014.
At that point, it should also be possible for struggling
euro zone banks to be directly recapitalised by the region's
rescue fund, the European Stability Mechanism, a 500 billion
euro facility that started operating in October.
And by then, euro zone countries should also have agreed how
to coordinate their national schemes for winding up problem
banks and their national deposit schemes, according to the
intricate framework set out in the report.
For a diagram laying out the proposals, please click:
"The top, top priority is to complete the banking union,"
said a senior EU official who helped draft the report.
"It's basically a downpayment for the rest of the
integration process. We have to get banking union right."
Beyond banking union the Van Rompuy report, like an earlier
blueprint from European Commission President Jose Manuel
Barroso, gets much more ambitious and into difficult territory
in which member states may be concerned about sovereignty.
It proposes the establishment of a fund that would provide
"financial incentives" to member states as long as they are
meeting their economic targets and other agreed goals.
Some have likened the idea to a "candy machine" that would
dispense sweets to "well-behaved" countries. Eventually the fund
would grow into a stand-alone resources, financed by euro zone
countries, that would be used to provide assistance to any
member state that suffers an external or one-off shock.
Germany and France have differing visions of how the
stand-alone "fiscal capacity" should function and the issue is
likely to be debated intensely at the summit, even if any such
fund is not expected to be in place until after the end of 2014.
Van Rompuy's report suggests it could be the basis for
jointly issued euro zone debt at some point in the future, an
issue highly sensitive to Germany, which is concerned that it
will end up underwriting other countries excesses.
"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," the report says.
"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 even raises the possibility of the euro zone
establishing its own treasury, hinting at coordinated tax
policies across the currency bloc, another sensitive issue of
sovereignty that is likely to provoke sharp debate.
Officials underlined that the report was not a prescription
for the future, but a basis for discussion, and acknowledged
that some ideas were unlikely to survive.
"It tries to strike a balance between what is feasible and
what is desirable," the senior official who worked on the report
said. "But there are parts where perhaps it veers more towards
what is desirable rather than what is really feasible."
(Reporting By Luke Baker and John O'Donnell. Editing by Jeremy