Yesterday (14 October), eurozone ministers meeting in Luxembourg debated how to prop up banks likely to be declared unstable next year, after a new wave of health checks, but France's blunt criticism of Germany before the meeting laid bare the tensions surrounding the far-reaching financial reform.
Bank health checks by the ECB are a critical step in establishing a single banking framework for the eurozone, giving credibility to ECB supervision and paving the way for the bloc to cooperate on saving bust banks.
But even before ministers from the 17-nation currency area met in Luxembourg, France's finance minister accused Germany of holding up progress on banking union to protect its own 'strange' financial system of regional banks that are "deeply intertwined ... with local political circles".
"What Germany fears ... is ... a loss of political control over its banks, which means in the final analysis a loss of sovereignty," Finance Minister Pierre Moscovici wrote in a book to be published this week called "Battles to resurrect France".
German minister still in Berlin
"It just goes to show that the champions of European integration and political union are not always those who appear to be. That's why banking union is being built so slowly and with such difficulty," he wrote.
There was no immediate reaction from Berlin as Germany's finance minister, Wolfgang Schäuble, did not attend the first day of the two-day meeting because of talks to form a new German government.
The acrimony between the eurozone's two largest economies will complicate EU efforts to strike a deal by December on how to salvage failed banks, as set out by Europe's leaders.
Such a failure would put the ECB out on a limb when it begins supervision of eurozone banks late next year, without any means to shut or save banks in trouble.
Although nobody knows the true scale of potential losses at Europe's banks, the International Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face €230 billion of losses alone on credit to companies in the next two years.
Debate over recapitalisation of banks
During the region's debt turmoil, the European Union conducted two bank stress tests, considered flops for blunders such as giving a clean bill of health to Irish banks months before they pushed the country to the brink of bankruptcy.
The ECB's new checks are seen as the last chance to come clean for the eurozone as the bloc tries to set up banking union, a bold step in European integration.
Late last week, European Central Bank President Mario Draghi underscored the need for publicly funded back-ups to recapitalise banks, saying those must be in place before its review of banks' health, expected early in 2014.
But Germany and Finland want individual states to pick up the costs of any clean-up rather than resort to the euro zone's rescue fund, the European Stability Mechanism.
The debate opens amid ebbing political enthusiasm for banking union - originally planned as a three-stage process involving ECB bank supervision, alongside an agency to shut failing banks and a system of deposit guarantees.
In one sign of the divisions, Britain has repeatedly refused to sign off on the first pillar of the banking union framework, allowing the ECB monitor banks.
Having earlier agreed, London now wants additional assurances from EU finance ministers meeting today (16 October) Luxembourg that Britain, which is outside the euro and polices its own banks, will not face interference from the ECB-led euro bloc.
Meanwhile a discussion amongst finance ministers of this year’s Semester process – which sees the Commission issue country specific recommendations for each EU member states – is also likely to re-open wounds.
Moves to increase "bilateralisation" of the semester process
France is pushing for more “bilateral engagement” in future semesters between the Commission and member states before the Commission issues its recommendations.
The move reflects tensions between the EU executive and France following this year’s recommendations – issued in May – in which the Commission urged France to cut labour costs and to reform its pension system.
France subsequently failed to make in-depth changes to its pension system, and the European Commission expressed concerns over the additional burden it could place on the private sector’s competitiveness, piquing the French political establishment.
Other member states are believed to support France's efforts to enable member state officials to be more heavily involved in the semester process, at an earlier stage, before the Commission publishes its recommendations.