By Annika Breidthardt and Jan Strupczewski
VILNIUS (Reuters) - Germany is working on a plan that would allow the completion of a euro zone banking union without changing existing EU law, potentially removing a major hurdle to finish the most ambitious EU project since the start of the euro, EU officials said.
So far, Berlin has insisted the 28-nation bloc needs to amend its Treaty if it is to move the power to unwind or fix struggling banks from a national to a European level.
The compromise solution that officials in Berlin's Chancellery are working on, and discussing with European Union partners, would be a break-through because Germany's insistence so far would cause a lengthy and politically risky process.
The euro zone badly needs a banking union to restore lending to the economy, regain confidence and boost growth so that struggling economies in the south can repay their debt. It would also help to prevent another sovereign debt crisis.
"The Chancellery is preparing a solution for after the German elections. They are working together with euro zone officials on this," said one senior euro zone source involved in the negotiations.
In Berlin, a senior official said the government was thinking about many scenarios, not just one. Serious negotiations would only take place in November or December and were up to the next government, to be elected on September 22, the source said. The choice of plan would depend on the outcome of coalition talks.
EU officials were encouraged that Germany was now engaging in the negotiations, having so far pointed to legal obstacles. One Brussels official said the proposal had raised hopes for a solution by year-end even if positions were still far apart.
The head of the EU's finance ministers, Jeroen Dijsselbloem, said on Saturday work would pick up after Germany's elections to set up the agency that could order the restructuring or closure of any euro zone bank.
CURRENT TREATY IS ENOUGH
Two senior euro zone officials told Reuters that according to the compromise proposal discussed in Angela Merkel's Chancellery, Berlin could agree to set up a pan-European resolution agency on the basis of Art. 114 of the EU Treaty.
This legal base had been suggested as sufficient by legal services of the European Commission, the European Central Bank and the EU Council, but has not been endorsed by Germany so far.
However, in exchange the agency would only get to decide over the fate of the 130 euro zone banking groups that will be directly supervised by the ECB from the second half of 2014.
This would remove the smaller German savings banks, Sparkassen, often closely linked to local German politicians, from the remit of a European - rather than national - agency, officials said.
While no German politician is likely to talk openly about this idea before next Sunday's elections, German Finance Minister Wolfgang Schaeuble, asked if he could rule out a compromise solution based on Art 114 of the Treaty, said:
"Article 114 gives only limited scope and of course you can find a solution that is based on Article 114 but that would not be what the Commission proposed."
In order to avoid Treaty change, the Commission proposed earlier this year that it should have the final say on bank resolution itself even though it could act on the recommendation of a board that would include national authorities and the ECB.
Schaeuble has argued for a two-step approach to the "Single Resolution Mechanism" (SRM). The first step would be coordinated action between national resolution agencies and funds but without a pan-European agency. The second stage would require limited Treaty change to set up such an agency, he has said.
One of Germany's - and other member states' - concerns is the role the Commission would take in its own proposal. Berlin would be reluctant to accept a transfer of powers to the EU executive arm as it is already in charge of competition issues.
One source, speaking on the condition of anonymity, said ideally a new, independent institution would be created to resolve banks but in the meantime the permanent rescue fund European Stability Mechanism (ESM) could take on that role.
This would require a change of a separate Treaty between euro zone governments, on which the ESM is based. That would be much easier than changing EU's fundamental law because it would not require the consent of non-euro zone members, especially euroskeptic Britain.
The official said a solution could be found for the ESM to accommodate non-euro zone members if they decided to join the banking union.
However, the Brussels official - who does not work for the Commission - said that ultimately the authority to unwind banks would likely fall on the Commission as only that was feasible.
"By a process of elimination, you eventually get back to the Commission, even if it might be some time and lots of negotiation before we do get back there," said the official.
Another key German concern, limiting German taxpayer exposure to financing foreign bank closures, could be solved by using the ESM as a backstop for a future resolution fund.
The resolution fund is to be financed by banks themselves, but until enough money is accrued through their contributions, the ESM could lend to the fund to be repaid later, ECB board member Joerg Asmussen said on Friday.
(Reporting by Annika Breidthardt and Jan Strupczewski; additional reporting by Luke Baker in Brussels and Andreas Rinke in Berlin; editing by James Jukwey)