EU urges eurozone hardliners to settle ESM scope

(BRUSSELS) - The EU urged eurozone leaders Wednesday to forge ahead with reforms already agreed to resolve the debt crisis after three hardline member states raised the stakes with a tougher approach.

A June summit agreed to set up a European banking union with a single supervisor by year-end which in turn would allow the bloc's new European Stability Mechanism bailout fund to directly recapitalise banks in need.

On Tuesday, however, Germany, the Netherlands and Finland laid down a series of tough new conditions on these reforms, especially on the ESM, increasing the risk of a delay which restive markets could exploit.

Eurozone leaders "agreed on 29 June that the future European Stability Mechanism should have the possibility to recapitalise banks directly once the new supervision mechanism is in place," European Commission spokesman Olivier Bailly said Wednesday.

"This is, as far as we are concerned, the position of the (eurozone) member states," Bailly said.

The issue has been simmering for weeks with German Finance Minister Wolfgang Schaeuble warning early this month the ESM could not be used to recapitalise banks directly if the new cross-border banking union was not ready.

Schaeuble, Dutch counterpart Jan Kees De Jager and Finland's Jutta Urpilainen met Tuesday in Finland, setting down four principles on ESM use, as well as forging an alliance on financial help for Spain and Greece.

ESM direct bank recapitalisation decisions required an agreed "memorandum of understanding" and the ESM could only "take direct responsibility of problems that occur under the new supervision," they said.

"Legacy assets ... should be under the responsibility of national authorities," they added, a position that could mean the ESM might not have the right to manage the Spanish case.

The three also reiterated that the ESM should only be used as a last resort, after first trying private capital and then national public funds to help the banks.

"The message is we are a coalition of three that will be acting together (and tough) over the coming months on Spain, Greece and banking union," a participant told AFP during Tuesday's talks in Finland.

Spokesman Bailly noted the statement made in Finland but insisted that the starting point remained the June deal.

The views expressed by the three finance ministers form "part of an ongoing debate" that would see governments "clarify over coming weeks different details of the final design of the ESM," Bailly said.

The issue, however, would be "eventually for them to decide," he acknowledged as the EU looks ahead to key summit meetings in October, November and December.

An EU source who asked not to be named said of the possible delay the declaration from Finland might signal: "We won the confidence of the markets in June with the idea we would move quickly.

"We didn't dream this. We understand that the three states want to go back over this but they have to discuss this with the others."

The EU also agreed in June to lend recession-battered Spain up to 100 billion euros ($130 billion) to rescue its banks but since then the wider question of whether Madrid might need a full sovereign bailout has driven developments.

European lawmakers meanwhile discussed the banking union issue Wednesday, expressing concern that it could divide the eurozone's 17 states from their 10 non-euro partners, led by Britain which opposes any move that could undercut its oversight of the City of London financial centre.

The Parliament highlighted the risk it could end up a threat to the EU single market of some 500 million people.