EU leaders to make banking union, bailout fund priorities in euro zone overhaul

BRUSSELS (Reuters) - European Union leaders are likely to decide on Friday to give priority in euro zone integration to completing its banking union and expanding the tasks of the euro zone bailout fund, leaving politically more difficult issues for later.

Leaders of the EU's 27 countries that will remain in the bloc after Britain leaves in March 2019 will discuss ways to deepen euro zone integration on Friday, starting six months of detailed talks by finance ministers.

Euro zone leaders generally agree one aim of deeper integration is to better protect the 19 countries using the euro from financial crises. Another is to help rally the EU around the single currency.

But French President Emmanuel Macron, German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker have widely differing view on what form greater integration should take.

In a letter to the leaders, summit chairman Donald Tusk suggests they focus on three areas of "broad convergence".

The first two are the development of the euro zone bailout fund ESM and making it a backstop for the euro zone's bank- resolution fund in an emergency -- an idea that has been on the cards since 2013. With no near-term prospect of a crisis, the issue is no longer controversial. Turning the bailout fund into a European Monetary Fund also has backing, Tusk said.

The new fund would handle future bailouts together with the European Commission, eliminating the ECB and the International Monetary Fund, which has clashed with euro zone governments over debt relief for Greece over its latest bailout.

Tusk said leaders also broadly agreed to set out when and under what conditions the euro zone could gradually introduce a European Deposit Insurance Scheme that would increase confidence in euro zone banks.

MORE DIFFICULT QUESTIONS

But at the heart of the debate are more difficult issues, like creating a euro zone budget and a finance minister and simplifying EU budget rules.

Paris wants a euro zone budget of several hundred billion euros, while Berlin wants no budget at all. The Commission is proposing a euro zone line in the existing EU budget.

Officials also talk of a rainy day fund, an unemployment insurance scheme and a fund to support investment in crisis.

Macron would also like to see a euro zone finance minister in charge of the euro budget and the bailout fund. Germany is skeptical, unsure what powers such a position would carry.

The Commission is proposing a third option - a European Minister of Economy and Finance who would be a senior Commission official in charge of all EU money, bailout fund included, and accountable to the European Parliament.

This is anathema to euro zone governments, which see it as a power grab by EU institutions. Euro zone ministers say the 500 billion-euro lending capacity of the bailout fund is ultimately backed by their national budgets, so it cannot be EU money.

Euro zone ministers also want EU budget rules, which set limits on government borrowing, to be simplified and the political discretion that the Commission now has in policing them to be more limited for greater predictability.

Germany, Slovakia and others are pushing to introduce a sovereign insolvency mechanism, which would put market pressure on governments to conduct prudent fiscal policy. Countries with huge public debts, like Italy, are against.

Tusk's letter to leaders said there was no broad convergence on neither of the more difficult issues.

"Leaders are encouraged to indicate whether they agree ... to mandate the (EU finance ministers) ... to take forward work on the above issues, giving priority to those where there is the largest degree of convergence," Tusk said.

(Reporting By Jan Strupczewski, editing by Larry King)