EU proposes banking union as 'big leap forward' to save bloc

(BRUSSELS) - With the European Union facing its biggest crisis in 60 years, Brussels proposed Tuesday taking "a big leap forward" to save the troubled bloc by setting up a single banking union.

The suggestions to be put to a summit on Thursday and Friday were made public after being delivered to the bloc's 27 capitals by EU president Herman Van Rompuy, European Commission president Jose Manuel Barroso, European Central Bank chief Mario Draghi and Eurogroup head Jean-Claude Juncker.

A report from the four titled "Towards a genuine economic and monetary union" suggests EU leaders agree that a pan-European banking authority be put in place and give Brussels the final say over national budgets in the eurozone.

"We need a banking union, a fiscal union and further steps towards political union," Barroso told a conference.

"The first of these building blocks that can be achieved quickly without treaty change is an integrated financial framework, a banking union," he said

Under intense global pressure as the two-and-a-half-year sovereign debt crisis infects Spain and Cyprus after Greece, Ireland and Portugal, EU officials have been scrambling to shore up monetary union with banking, fiscal, and eventually political union.

The report however sets no deadlines for deepening EU integration, offering instead to finalise a grand roadmap for the future in December.

Diplomatic sources say a firm proposal on banking union is expected in October if EU officials get the go-ahead from heads of state and government at the June 28 and 29 summit.

The proposal sees the Frankfurt-based ECB tasked with banking supervision across the 17-nation eurozone, with the London-headquartered European Banking Authority (EBA) overseeing the sector in the remaining 10 non-euro states.

That would satisfy major powers Germany and France, as well as Britain, which could sign on to such a scheme or opt to remain out as it has on other issues.

To reassure depositors and insure against bank runs, Brussels is suggesting Europe-wide guarantees on deposits.

It also proposes a so-called "resolution" scheme mainly funded by banks to close down bad banks.

Brussels suggests that its new rescue fund, the European Stability Mechanism (ESM) -- to come into being in July -- could act as the backstop to both the deposit guarantee and resolution authority.

This would enable the ESM to directly prop up distressed banks, as Spain, the eurozone's fourth economy, is currently requesting, rather than loan to governments, as Berlin demands.

Many economists have urged the eurozone to break a so-called "feedback loop", where sovereigns face mounting borrowing costs when forced to help their own banks, leading to a vicious circle of mounting debt weighing on all institutions.

"We can break this negative cycle now if we are bold enough to establish a strong and integrated financial framework," Barroso said. "A single rulebook is vital for the single market in financial services."

In the longer term, the proposals also call for "steps towards common debt issuance," or joint borrowing through so-called eurobonds.

Along with pooling of risks, the proposals call for pooling of decision-making on budgets, long considered a sovereign political right.

Bracing for criticism, Barroso told his audience that "this crisis is the biggest threat to all that we have achieved through European construction over the last 60 years.

"Faced with this stark reality, standing still is not an option. A big leap forward is now needed."

Towards a genuine Economic and Monetary Union - Report by President of the European Council