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Germany Backtracks on Banking Union

German Finance Minister Wolfgang Schaeuble (AP Photo/Michael Sohn, Pool)
Michael Sohn
German Finance Minister Wolfgang Schaeuble (AP Photo/Michael Sohn, Pool)

Germany sent the strongest signal that it could be dropping its opposition to a Europe-wide banking union on Tuesday, with the country's finance minister saying it was a "priority."

Germany has so far resisted the idea of a Europe-wide banking union, which would put Europe's largest banks under the supervision of the European Central Bank (ECB) and could expose German taxpayers to the costs of future bank bailouts. Critics have alleged that Berlin wants to keep its politically important Landesbanks under state supervision.

But, in an abrupt turn-of-face, German Finance Minister Wolfgang Schaeuble pledged on Tuesday to set up the banking union in Europe "quickly," Reuters reported.

"It is a priority project," Schaeuble told an audience at the Berlin Free university where he was speaking with his French counterpart, Pierre Moscovici.

"We must make the best of it on the basis of the current treaties, and where we do not manage to achieve things institutionally, then we will work inter-governmentally or even bilaterally," he added.

(Read More: Draghi Confesses to Pope: We Are Frustrated, Too )

On Monday, ECB executive board member Yves Mersch said a joint banking supervisor also required a centralized authority to unwind failing banks. But Schaeuble had rejected the idea on Monday, saying that this would require treaty changes and Europe should cultivate better cooperation between its banking authorities as a "second-best solution," AP reported.

But, according to one economist, investors shouldn't expect Germany to agree to the union in a hurry.

"I doubt that Germany will agree to something like this before the German elections, its' such a sensitive subject I don't see anything happening in the short-term," Giada Giani, European economist at Citigroup told CNBC on Tuesday.

"The pressure is building on Germany to do something—both from the Italian and Spanish leaders and in France and also from the ECB itself which is putting its weight behind a single supervisory regime of Europe's banks," she added.

(Read More: Why the ECB Is 'Stupid' Europe's Best Hope)

Germany is also under pressure to rollback opposition to the creation of Eurobonds—which would mutualize euro zone sovereign debt. The German government and central bank have so far refused to discuss the idea, fearing that Germany would be forced to shoulder the cost of bailouts in southern Europe.

On Tuesday, French Finance Minister Pierre Moscovici said Europe had to think about "common budget capacity" which could make common debt instruments possible in the medium-term, Reuters reported.

Germany was recently criticized by the billionaire investor George Soros, who said that Germany should exit the euro zone if it continues to block the introduction of Eurobonds.

(Read More: Soros Battles Top German Economist in Euro Spat )

By CNBC's Holly Ellyatt

Contact Europe: Economy

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