EU squabbles over bank aid and recession relief

By Ilona Wissenbach and Paul Carrel

BRUSSELS (Reuters) - Tensions over state support for banks surfaced as European Union finance ministers met on Tuesday to discuss how much money governments could mobilize to combat recession.

European Union Competition Commissioner Neelie Kroes, facing fierce pressure from member states to approve state aid to ailing banks, pledged after meeting the ministers that the EU executive would approve new rules shortly.

Kroes said in a statement that the Commission expected banks that received state aid to give commitments to lend to the real economy.

"The Commission will shortly adopt a communication giving detailed guidance on how to assess such recapitalizations under the state aid rules," she said.

However, the Commission separately announced that proposed German assistance for Commerzbank does not respect European Union rules on state aid.

"There is a regime for supporting banks which has been approved by us. However, the support for Commerzbank does not apparently respect the regime," spokesman Jonathan Todd said.

Germany had been in dispute for weeks with the Commission over whether state aid for Commerzbank complies with the terms of a German bank rescue fund the EU has approved.

German Finance Minister Peer Steinbrueck said earlier Berlin, Paris and other EU capitals were unhappy with the European Commission approach to vetting state aid to banks caught up in a worldwide financial markets crisis.

"We do not approve of the schedule, of the procedure and above all of the Commission's speed," Steinbrueck said.

The Commission, which applies EU state aid rules, agreed at an emergency summit in October that those constraints would be relaxed in cases where governments had to recapitalize a banking system shaken by a crisis of confidence.

Steinbrueck's remarks were made to reporters on Monday night after a meeting of euro zone finance ministers that primarily focused on something else -- proposals for an EU-wide stimulus package that would commit 200 billion euros ($250 billion) of public money to shoring up demand and easing the pain of recession.

The remarks were embargoed for release on Tuesday, when finance ministers from all the 27 EU countries met in Brussels to discuss the stimulus plan.

Steinbrueck said Germany, France and some other EU countries were dissatisfied with the European Commission's approach in the review of bank recapitalization, and EU Competition Commissioner Neelie Kroes was set to meet ministers on Tuesday on the issue.

Swedish Finance Minister Anders Borg joined the fray, accusing the Commission of not being constructive and insisting "we have to call off these legions of state aid bureaucrats."

"We are all heading toward a difficult time in the European economy. It will be a long cold winter. I think we do have the risk of a huge policy mistake. We need to restore the credit channels," he told reporters.