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Analysis: America to Europe: Stronger banking union would help boost growth

French President Francois Hollande (L) welcomes U.S. Treasury Secretary Jack Lew (C) and French Finance Minister Pierre Moscovici (R) at the Elysee Palace in Paris January 7, 2014. REUTERS/Philippe Wojazer

By Jason Lange

BERLIN (Reuters) - The United States has a message for Europe: If you want to help your ailing economy, consider pledging taxpayer money from across the euro zone to help troubled banks.

Washington dispatched Treasury Secretary Jack Lew this week to Paris, Berlin and Lisbon in part to convey concerns about the euro zone's need to revitalize banks crippled by a debt crisis.

The issue has jumped up the United States' worry list, overshadowing a previous spat with Berlin about criticism of Germany's export-driven economic model.

Speaking in Paris on Tuesday, Lew urged Europeans to go beyond the deal struck last month to create shared institutions for winding down failed banks.

Washington "would like to see more action taken" to create common backstops for banks and to insure they have enough capital to make enough loans to create jobs, he said.

"The more capital that there is in European banks, and the stronger the backstops are, the better it is for the European economy, the U.S. economy and the world economy," he said.

In private, U.S. officials have been more direct on the banking union's shortcomings. A shut-down fund would use bank levies to amass 55 billion euros ($75 billion) over the next decade, a tiny sum relative to size of bank balance sheets.

Also, European countries whose public finances have been devastated by a debt crisis might be hard-pressed to bail out troubled banks on their own.

Washington's view is that pooling the resources of euro zone governments - anathema to Berlin which doesn't want to foot the bill - could improve the credibility of the resolution fund and boost confidence in the banking system which would then be able to lend more.

"Ultimately, our view is that banking union requires a significant degree of risk and cost sharing between members," a senior Treasury official told reporters in a briefing on Lew's trip.

"An effective, credible banking union, in our minds, should include ... recapitalization authority and a credible deposit insurance," he said.

While the euro zone shares a common currency, the bloc does not back the banks of member countries in the way America's federal government guarantees deposits across U.S. states.

Under the agreement reached in December, national EU governments will remain ultimately on the hook for the cost of a failing bank for several years at least, while plans floated in 2012 for a common deposit guarantee have long since bitten the dust.

Many European banks are trying to heal their balance sheets by reducing liabilities, but that means less lending - a worry to Washington because this drags on the economy.

Lending by euro zone banks to non-financial companies fell at a 3.9 percent annual rate in November, and declines have been growing more acute in recent months.


So far, the type of cost sharing favored by Washington has been ruled out by Germany, which does not want to commit taxpayer money to bank bailouts in other countries.

German Finance Minister Wolfgang Schaeuble is likely to reiterate that when he meets Lew later on Wednesday. Lew then flies to Lisbon for talks with Portuguese Prime Minister Pedro Passos Coelho.

Lew is seeking to build ties with like-minded officials in other corners of the continent in an attempt to build momentum for a deeper banking union and reorient the focus of policymakers toward boosting growth.

French Finance Minister Pierre Moscovici, following a meeting with Lew on Tuesday, said: "We have converging views and are hoping to get our voices heard."

French President Francois Hollande, with whom Lew also met on Tuesday, is due to make a state visit to Washington in February.

Much has been made of America's recent criticism of the German economic model, and whether that criticism creates tension between Lew and Schaeuble.

In October, the U.S. Treasury said in a report to Congress that Germany wasn't doing enough to spur its domestic economy, and that its dependence on exports was putting downward pressure on wages and prices around the world.

German politicians were furious, saying Germany's export success is a reflection of its competitiveness and highly-skilled workforce.

But any tension there is likely to be secondary to the banking union issue for a number of reasons.

For one, the United States has little moral high ground with Germany on issues of macroeconomic policy. Washington has engaged in harsh austerity in recent years and has had little success boosting real wages - both of which keep domestic demand low.

Also, boosting domestic demand in Germany could take some time, while the risks of a flawed banking union could be more pressing. The European Central Bank is due to finish a review of big banks' balance sheets by year's end, and might call on some to recapitalize.

Adam Posen, president of the Peterson Institute for International Economics in Washington, likens the process to a game of chicken between the ECB and Germany.

The reticence of Germany and other fiscally-strong states to commit taxpayer money puts pressure on the ECB to go easy on banks, some of which may require large amounts of capital.

On the other hand, the ECB is motivated to clean up the banking sector because not doing so could leave the region stagnating.

Washington might have some leverage.

For example, Posen said, U.S. investment in Europe could shrink if the banking sector there gets shakier, or America could drag its heals on a potential trade deal with Europe - another item on Lew's European agenda this week.

"On the banking union, the U.S. actually has much more traction," than it does on macroeconomic policy, said Posen, who was a policymaker at the Bank of England between 2009 and 2012. "And the U.S. is also at risk of more direct harm on that issue." ($1 = 0.7349 euros)

(Additional reporting by Leigh Thomas in Paris. Editing by Mike Peacock)