Van Rompuy paper points to EU summit pitfalls

Banking supervision, the single market, a centralized euro zone budget, a single bank resolution fund, direct recapitalization of banks from rescue funds and much stricter fiscal oversight.

If there were any doubts about how complex a task the Europe Union faces to protect the euro and shore up its finances, the agenda for the EU summit on October 18-19 should lay them to rest.

In an 8-page document setting out the issues for discussion, Herman Van Rompuy, the president of the European Council, touches on just about everything controversial facing the bloc.

But rather than offering specifics, the document is more of a wish-list of topics that need to be broached in the months ahead if the EU, and the 17 euro zone countries within it, are to press ahead with the risky and politically challenging task of retooling the economic and monetary union that binds them.

What's more, the European Commission, the EU executive that has the right to propose new legislation, has also pitched in. It too has ideas on banking union, budgets, changes to the EU treaty and how to separate retail and investment banking.

The upshot is that EU leaders and their finance ministers - who will meet in Luxembourg next Monday and Tuesday to prepare the ground for the October summit - have a vast array of suggestions and half-sketched proposals to work through, any one of which could aggravate tensions among major member states.

"It is hard not to be sympathetic to the various European finance ministries that will have to wade through all these proposals, and integrate them into a coherent whole," Alex White, an economist with JP Morgan in London, wrote in a research note on Wednesday.

"The next major point at which this will all be discussed is the European leaders' summit ... Another 4 a.m. compromise may lead to real confusion."

VAGUE ROADMAP

It is Van Rompuy's draft paper, distributed to EU capitals on October 1, that will form the basis for discussion at the summit and which raises the largest number of questions.

At the last summit in June, Van Rompuy was charged with looking into four areas that the EU needs to tackle in the years ahead: a banking union to strengthen the sector and weed out weaker banks; a fiscal union to toughen budget oversight; an economic union to coordinate labor and social policy; and a political union that makes the whole more democratic.

Over the past three months he has consulted the presidents of the European Central Bank, the European Commission and the Eurogroup, which represents euro zone finance ministers. The resulting draft will be discussed and refined ahead of the October summit, with a final report due in mid-December.

The language in the draft is necessarily vague to accommodate the positions of all member states, from Germany which is pushing for ever stricter rules to France's reluctance to surrender too much authority rapidly to Brussels, and the myriad concerns of smaller countries such as Estonia.

When it comes to the possibility of a single euro zone budget, something Germany has advocated in recent weeks as a potential way of coordinating transfers among member states, Van Rompuy touches on the issue without pointing in any direction.

"For the euro area, beyond the current steps to reinforce economic governance, evolving towards an integrated budgetary framework is necessary to ensure sound budgetary policies," says the draft, which will be revised repeatedly in the weeks ahead.

"In that context, mechanisms to prevent unsustainable budgetary developments as well as mechanisms for fiscal solidarity, e.g. via an appropriate fiscal capacity, should be explored."

European Commission spokesman Olivier Bailly told a regular news briefing on Wednesday the EU executive would put forward its own proposals on budgets later this year.

The language on more oversight of economic policy, already strengthened by an annual cycle of policy recommendations for each country put in place in 2012, is equally carefully hedged:

"The idea for the euro area member states to enter into individual contractual arrangements with the European level on the reforms they commit to undertake and their implementation should be explored," the draft reads.

Diplomats are already playing down the chance of any breakthrough at the summit, calling it a "stock-taking exercise".

What's more, immediate problems in Spain and the possibility of the country applying for a fuller bailout from the euro zone's rescue funds could hijack the summit at the last minute.

And there are issues left over from the June summit - such as how to interpret when it will become possible for the rescue fund, known as the ESM, to directly recapitalize banks - that will have to be resolved when leaders meet in October.

"Behind every one of the discussion points, there is the basis for an extended dispute between Germany and France, Finland and Spain, Ireland and Germany and pretty much any other country you care to mention," one diplomat said.

"It could be a long-winded summit."

(Writing by Luke Baker)