STRASBOURG, France – European Union officials are asking national governments to give up control of their banks as they try to pull the region closer together to solve its crippling financial crisis.
In a proposal that represents one the most significant surrenders of national sovereignty since the creation of the euro in 1999, the European Commission, the EU's executive arm, proposed Wednesday to make the European Central Bank the single supervisor for all 6,000 banks in the 17 countries that use the currency.
The Commission wants to give the ECB sweeping powers: from the ability to grant and take away banking licenses to extensive authority to investigate and fine wayward banks.
Jose Manuel Barroso, the Commission's president, warned that giving up control of banks would be just the start and that countries would have to get used to handing over powers to Europe in order to solve the region's debt problems.
"We cannot continue trying to solve European problems just with national solutions," he said in his annual State of the Union address to Parliament in Strasbourg, France.
"A deep and genuine economic and monetary union ... means ultimately that the present European Union must evolve," he added. "And let's not be afraid of the words. We will need to move toward a federation of nation states."
Barroso's remarks go to the heart of the debate about the survival of the eurozone — whether countries can continue to share a common currency without a unified political system.
As part of forging a tighter EU, many observers and politicians have called for a "banking union" — a unified playbook for all the region's banks.
The creation of a single bank supervisor is an important part of this plan and a pre-requisite to other measures being debated: a European-wide system of depositors' insurance; a single method for winding down bankrupt banks; and allowing the European bailout fund to directly help banks in trouble, instead of lending money only to governments.
In its proposal, the Commission called for the European Central Bank to take over supervisory roles from the member countries' national banking supervisors. Currently, the ECB is only in charge of monetary policy for eurozone countries — setting interest rates and printing money.
The plan would also give the ECB the ability to issue and revoke banking licenses, approve large mergers and acquisitions, investigate banks and fine institutions that break the rules.
Since many of the measures designed to shore up the banks and reduce the burden they're placing on governments can't proceed without the single supervisor plan, getting it in place quickly is crucial.
But already there is disagreement and battle lines are being drawn. Germany only wants the largest banks to be under ECB control.
"What is important above all is that this supervisor can work in terms of quality — not just that it comes into force as quickly as possible but then doesn't work," Merkel told lawmakers in Berlin on Wednesday. "This is about the quality of supervision, and not just about the quantity."
A European Union official mounted a more vigorous defense of the proposal, warning that a slimmed-down supervisory system would be "irresponsible."
"What the crisis has taught us is that even medium or small banks can create lots of damage," said the official, who would speak only on condition of anonymity to describe how the proposal was put together
Europe's banks are at the heart of the region's financial crisis. The government bonds that the banks bought up during the eurozone's boom times are no longer considered safe bets, and the banks are struggling to unload them — usually at hefty losses. On top of this, banks have also had to contend with real estate loans that have turned toxic following the collapse of real estate markets in some countries.
Across the eurozone, governments have had to step in and prop up the banking sector. But rescuing banks is expensive and has added to investor concerns that European countries' debt loads are becoming increasingly unsustainable.
Many banks have also drastically cut back their business: lending to fewer companies and households and ditching investments in other eurozone countries — especially in Greece, Italy and Spain. As well as freezing up the eurozone's economy, this retrenchment has undermined one of the primary purposes of the single currency — to allow money to flow freely and cheaply across national borders.
Part of these problems stem from a lack of proper oversight of banks in some eurozone countries, but also because Europe's banks have become so interconnected that 17 separate supervisory systems aren't able to respond as swiftly as they should.
Mujtaba Rahman, an analyst with the Eurasia Group, says securing approval for the plan in the European Council, where any of the 27 EU countries could veto the plan, is likely to take time.
"You're unlikely to get unanimity by the end of the year," he said.
Delays in deciding on what the ECB can and can't do are likely to have a knock-on effect to plans to help out stricken banks. Countries concerned that there is no proper supervision of a country's banks would be reluctant to let the eurozone's bailout fund, the European Stability Mechanism, lend directly to banks. This is especially important for Spain, which has been granted a €100 billion loan from the ESM to prop up its banks. Without this help, it may have to seek a rescue loan for itself.
"You're in a comfortable place now, but, at some point, it gets messy," Rahman said.
The plans could heap even more responsibility on the central bank. There is a provision allowing any of the 10 countries in the European Union that don't use the euro to sign up to the supervisory system as well.
In his speech Wednesday, Barroso warned that leaders must find a way out of the crisis because it is "fueling populism and extremism."
Geir Moulson in Berlin and Don Melvin in Brussels contributed to this report. Melvin can be reached at http://twitter.com/Don_Melvin . DiLorenzo can be reached at http://twitter.com/sdilorenzo .