By John O'Donnell and Robin Emmott
BRUSSELS (Reuters) - Germany and France clashed publicly on Tuesday over plans to put the European Central Bank in charge of supervising banks, deepening a dispute over the scope of ECB powers that threatens to derail one of Europe's boldest reforms.
With time running out to meet a pledge to complete the legal framework for an EU-wide banking union by the end of the year, Germany's Wolfgang Schaeuble told a meeting of finance ministers he could not support a plan that would give the ECB's Governing Council the final say on supervision.
France's Pierre Moscovici and the ECB protested against any watering down of a plan central to Europe's response to a five-year banking crisis and which promises to unify the way it deals with problem banks, ending a previously haphazard approach.
"The right of the last decision cannot be left to the ECB Governing Council," Schaeuble said in comments broadcast to reporters, going on to say that allowing it to happen could obscure the ECB's primary monetary policy mandate.
There could be no deal unless national supervisors had responsibility for most banks, he added, dampening expectations of a quick agreement on what will be a cornerstone of the closer integration needed to secure the euro's future.
"A Chinese wall between banking supervision and monetary policy is an absolute necessity," he said, also voicing skepticism that an independent central bank such as the ECB could even take on the tasks of supervision.
Moscovici countered that EU leaders, who had given finance ministers responsibility for drawing up a supervisory framework, had placed the ECB at the center of their vision.
"We have no mandate for a dual system of supervision, which would call into question the existence of a single system for some banks," said Moscovici, conceding after the meeting that their differences were difficult to hide.
The depth of divisions between Europe's two biggest economies and the leading engines for euro zone integration makes a year-end deadline uncomfortably tight.
Ministers will resume discussions on December 12, a day before EU leaders meet for their final summit of the year. The news briefly pushed the euro weaker against the dollar.
ECB Vice-President Vitor Constancio expressed alarm at suggestions that the Frankfurt-based bank may not receive the mandate to supervise banks at all, something hinted at by Schaeuble but spelt out bluntly by Austria's finance minister.
Until Tuesday, it had been the working assumption by all EU countries that the ECB would be put in charge of overseeing up to 6,000 banks, starting with the biggest ones and gradually phasing in full monitoring over the course of a year.
Austria's Maria Fekter said that EU leaders, in making their pledge to establish a new system of supervision, "did not decide the hegemony of the ECB, just involving the ECB" and accused Constancio of misrepresenting their intentions.
The suggestion was rebutted by Constancio. "It is inside the ECB, as the summit has decided," he said, although Schaeuble also questioned that reading of the leaders' June decisions, which called for the ECB to be given overriding oversight.
Small German banks want curbs on the ECB's scope and the influential German Savings Banks Association welcomed in a statement the fact that no "hasty" decisions had been taken.
EU leaders hope that by setting up a single, powerful banking authority and later establishing a resolution fund for distressed banks, they will cut the link between indebted countries and their banking systems.
Most countries support the idea of supervision, the first pillar of a banking union, but disagree on how best to structure it, how far to go in unifying banking systems to share risks and how to accommodate both euro and non-euro countries.
Complicating the debate further is Sweden, a non-euro zone country that has substantial banking interests in Finland, which uses the euro. Sweden is concerned that if the ECB is to have oversight of assets it owns, it must have some level of equal representation at the euro zone central bank.
Having earlier threatened to block agreement, Sweden's Finance Minister Anders Borg appeared to soften his stance on Tuesday, saying compromise was possible if non-euro countries were treated fairly and national regulators retained autonomy.
Diplomats also need to address the concerns of non-euro zone countries that aim to join the currency, such as Poland and Hungary, which also want to ensure they are not disadvantaged by the ECB taking a more powerful oversight of their banks.
Leaving the meeting, Poland's Finance Minister Jacek Rostowski once again called for non-euro zone countries to get equal rights if they join a banking union, cautioning that while a deal was possible this year, there was no need to rush.
Germany is also concerned the project will develop into a scheme under which Berlin is left to foot the bill for banks too weak to survive on their own when, as is planned, a central resolution scheme is set up to close troubled lenders.
It is wary about directly recapitalizing banks from the euro zone's rescue fund, which will be possible once banking supervision is up and running.
Finally, an answer must be found to Britain's demands for a change to voting rules for when regulators from across the 27-country European Union meet to flesh out law.
If ministers reach agreement on Wednesday next week, it might allow them to finalize the framework by a summit of EU leaders on December 13-14, as long as the European Parliament also plays its part and gives its approval.
"It's not impossible to reach a deal this year but it will be more difficult," said Sven Giegold, a German member of the parliament who will be involved in the negotiations.
(Additional reporting by Annika Breidthardt and Jan Strupczewski; Editing by Rex Merrifield and Luke Baker and Catherine Evans)