By Gernot Heller and Leigh Thomas
BERLIN/PARIS - (Reuters) - Germany and France were split on Friday over European Union plans for a new agency to wind down troubled banks, with Berlin saying they go too far in centralizing control in Brussels.
The body would form part of a banking union designed to underpin confidence in the euro zone and end the previously chaotic handling of cross-border bank collapses.
But German Finance Minister Wolfgang Schaeuble said in a letter to the EU official in charge of the plans that the European Commission is trying to pocket too much power.
Schaeuble wrote in his letter to Michel Barnier, Commissioner for Internal Market and Services, that the proposal for the Commission to make the final decision on whether to wind down banks was out of step with European Union law.
"The proposal published by the Commission regrettably envisages too high a degree of centralization with regard to the boundaries of the existing (EU) law," reads the letter, which was seen by Reuters on Friday and is dated July 11.
"The proposal does not match the current legal, political and economic realities and would create major risks," Schaeuble wrote, adding that the transfer of powers to the Commission was not backed by EU treaties.
French Finance Minister Pierre Moscovici welcomed the proposal, saying it would be a pillar of the euro zone's new banking union.
"Now we have to work out the details of the mechanism for resolving banking crises within the euro zone, which requires the capacity to respond quickly," Moscovici said in a statement.
The Commission on Wednesday presented plans for an agency to salvage or shut troubled banks, in which it would call the final shot. This would be the second of three pillars of the 'banking union' meant to galvanize the response to the euro zone crisis.
As Europe's biggest country, Germany's support is crucial for the proposal to become law. But looming federal elections make it unlikely the government will sign up to anything which could be seen as exposing it more to the euro zone's troubles.
Sources close to Berlin say the government is confident it could line up enough support from others to shoot down the Commission proposal, if necessary.
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During a visit to London, Barnier said his plan was the only one which could be enacted fast and restore confidence in banks without a treaty change, which could take years to agree.
"My responsibility is to find solutions now," Barnier told reporters, adding there were safeguards in the plan so that no country is obliged to use taxpayer money to save a bank.
"It was not the Commission's wish to have a bigger role in this," he said.
There was room for negotiation and that some types of banks, such as regional lenders, don't have to be treated in the same way as big cross-border rivals, Barnier added.
Once banking union is fully operational, the hope is that it would end the previously disorderly handling of cross-border bank collapses like Dexia and would mean those who take risks pay, rather than taxpayers.
Germany's opposition is no surprise, especially with federal elections looming. Schaeuble has long argued that an EU Treaty change is necessary before a resolution agency could get executive clout. He reiterated in the letter that Germany wanted a two-step approach to get there.
The first stage should build on national resolution authorities taking coordinated decisions, with a board at the central level to "ensure quick, effective and coherent decision-making", Schaeuble wrote.
"This approach would not exclude the Commission. To the contrary, I advocate a decisive role for (the Commission) to rigorously apply the State Aid rules as minimum standards, and to protect taxpayers' interests," read the letter.
Phase two would require a treaty revision and a more centralized solution, Schaeuble wrote.
An EU official said it was "early days" and the Commission had proposed what member states had asked it to.
"We expect this to be approved by the end of the year. There will be compromises. Germany wants a network of national authorities and that does not take us much further than the status quo," the official said.
(Reporting by Gernot Heller and Annika Breidthardt in Berlin, Huw Jones in London and Leigh Thomas in Paris, writing by Annika Breidthardt, editing by Stephen Brown, Ron Askew)