* Germany wants big leap forward in euro integration
* Spanish PM backs central budget authority for bloc
* EU summit could give green light for "fiscal union" road
* Doubts whether closer integration can restore confidence
* ECB may have to be prime actor in the short-term
By Noah Barkin and Daniel Flynn
BERLIN/PARIS, June 3 When Jean-Claude Trichet
called last June for the creation of a European finance ministry
with power over national budgets, the idea seemed fanciful, a
distant dream that would take years or even decades to realise,
if it ever came to be.
One year later, with the euro zone's debt crisis threatening
to tear the bloc apart, Germany is pushing its partners for
precisely the kind of giant leap forward in fiscal integration
that the now-departed European Central Bank president had in
After falling short with her "fiscal compact" on budget
discipline, German Chancellor Angela Merkel is pressing for much
more ambitious measures, including a central authority to manage
euro area finances, and major new powers for the European
Commission, European Parliament and European Court of Justice.
She is also seeking a coordinated European approach to
reforming labour markets, social security systems and tax
policies, German officials say.
Until states agree to these steps and the unprecedented loss
of sovereignty they involve, the officials say Berlin will
refuse to consider other initiatives like joint euro zone bonds
or a "banking union" with cross-border deposit guarantees -
steps Berlin says could only come in a second wave.
The goal is for EU leaders to agree to develop a road map to
"fiscal union" at a June 28-29 EU summit, where top European
officials including European Council President Herman Van Rompuy
will present a set of initial proposals.
European countries would then put the meat on the bones of
the plan in the second half of 2012, several European sources
have told Reuters, including a timetable for overhauling EU
treaties, a step Berlin sees as vital for setting closer
integration in stone.
"The fundamental question is relatively simple. Do our
partners really want more Europe, or do they just want more
German money?" a government official in Berlin said.
If European countries go ahead, the steps would represent
the most significant policy leap since they agreed to give up
their national currencies and cede control over monetary policy
13 years ago. But the hurdles are daunting.
"The world is not coming to an end; rather, it feels as if
we are on the doorstep to another major European integration
move," said Erik Neilsen, chief economist at Unicredit. "But why
do these initiatives only come when we are on the edge of the
cliff where the risk of an accident is so much higher?"
Spain, whose banking troubles have made it the latest target
of financial markets, signalled over the weekend that it was on
board with a key element of the plan.
Prime Minister Mariano Rajoy backed the creation of a new
euro-wide fiscal authority of the kind Trichet sketched out in a
speech in Aachen, Germany last year.
But other states, including the bloc's second-biggest member
France, have deep reservations about ceding so much sovereignty.
New President Francois Hollande rode to victory in a French
election last month promising new steps to boost growth. At the
EU summit later this month, he and other leaders were expected
to gang up on Merkel, pressing her for new growth-enhancing
But after a series of modest concessions from the German
leader, a loose consensus on a growth strategy already appears
to have been reached weeks before the leaders meet.
Now, the main focus of the summit seems likely to be on
steps needed for a "fiscal union", a debate which puts Hollande
in a far more difficult position, even if people who know him
well say his vision of Europe is much closer to the federalist
German model than those of his Gaullist predecessors.
"It's a big challenge for Hollande," said a senior French
official who declined to be named. "I think that he is ready for
(closer fiscal integration) but I think the rest of the French
political class - both on the left and right - is not."
The hope in Berlin and other capitals is that if leaders can
present a credible plan for moving towards a fiscal union,
further contagion - even in the event of a Greek exit from the
euro zone - can be limited, one senior central banker said.
But even if the Germans do win over the French and other
sceptical countries like Finland and Austria, there are serious
doubts about whether a 5-10 year plan for closer integration -
weighed down by lengthy national debates over treaty change -
will be enough to restore investor confidence now.
That means for some time the European Central Bank will
remain the institution capable of acting quickly to avert
Even though it has made clear it wants governments to sort
out the mess, a strong signal of intent from EU leaders could
encourage the Frankfurt-based ECB, particularly if progress is
made towards the sort of bloc-wide banking structures it has
"The European leadership is working feverishly on the
necessary fundamental changes, while the ECB no doubt stands
ready with the fire hose if anything goes wrong in the
meantime," Neilsen said.
On top of Greece, Spain's banking sector, dragged down by
bad property debts, is a huge concern that continues to
undermine faith in the bloc's ability to get a grip on its
Germany is pressing Madrid to accept aid under the bloc's
rescue funds so that it can recapitalise its stricken financial
institutions, multiple sources have told Reuters.
But the Spanish government is resisting, fearful of the
stigma attached to a formal state rescue. It is trying to
convince its partners to let EU bailout funds bypass the state
and funnel aid directly to banks - a step Berlin opposes.
As long as the Greek nightmare continues and doubts about
Spain's banks persist, no amount of closer integration is likely
to calm investor nerves.
The ECB is already girding, however reluctantly, to counter
any new turmoil in the months ahead.
One ECB source told Reuters the bank had a number of tools
at its disposal to tide the bloc over, including cutting
interest rates and launching a third round of cheap loans to
banks via a so-called Long Term Refinancing Operation (LTRO).
It is much less keen to revive its government bond-buying
Another problem with the German-led drive is that of
Many of Europe's struggling citizens already blame
technocrats in Brussels for their troubles. And lawmakers across
the bloc are keen to safeguard their right to veto EU decisions.
Against that backdrop it will be extremely difficult for
leaders to convince their electorates about the integration
steps under consideration in Berlin and other capitals.
To address this, officials are mulling a significant
strengthening of the role of the European Parliament (EP), which
is directly elected by the bloc's citizens.
A German official at a European institution said, for
example, that oversight powers for the bloc's permanent rescue
fund - the European Stability Mechanism (ESM) - could be
transferred from national assemblies to the EP.
The French official said it would inevitably fall to the EP
to monitor the European Commission if it won new powers over
"The issue is that democratic control will now take place at
a European level, and not at a national one," the official said.
"I think the problem is not so much the European people but the
European politicians who don't want to relinquish their power.
There you will see a lot of resistance."