BRUSSELS (Reuters) - European finance officials will discuss progress towards a banking union on Friday, amid signs the ambitious plan for a single banking framework for the euro zone is stalled as Germany and others argue over its scope.
The informal meeting of EU finance ministers and central bank governors in Vilnius on Friday and Saturday is not expected to break new ground but is their first chance since July to take stock of the increasing number of hurdles to the plan.
"I don't have high expectations for the discussions in Vilnius, in any regard. It will be a 'let's get up to speed what we have ahead of us' type of meeting," one official involved in preparation of the meeting said.
"There will be a nice discussion on the broad aspects of the banking union and the nitty-gritty of the resolution mechanism and other controversial issues will be left for later."
The 28-nation bloc, and especially the 17 countries that share the euro currency, need a banking union to break the vicious circle between indebted governments and banks which lay at the heart of its sovereign debt crisis.
But the project, scheduled to start in April 2014, has been dogged by delays as governments and EU institutions haggle over the division of powers and responsibilities.
Germany has particular concerns about the scope of the project and has been reluctant to push ahead with talks ahead of its elections on September 22.
European Commission President Jose Manuel Barroso urged governments on Wednesday to move faster on banking union, warning "there is no way back to business as usual".
International Monetary Fund chief Christine Lagarde also said on Tuesday that speed was essential.
The deadline for the launch of the first step, which will see the European Central Bank start to supervise all banks in the euro zone, has already been pushed back twice, to late 2014, pending final agreement between the ECB and European Parliament.
The second element, a single authority that could close or restructure any failing bank in the euro zone is even more disputed, with agreement unlikely before an April 2014 deadline.
The third pillar - a single European deposit guarantee scheme - may not become a reality at all, officials say.
With signs the euro zone is emerging from recession and markets stabilising after the ECB's pledge to preserve the euro, euro zone politicians' sense of urgency seems to be waning.
Conscious of the challenge, Italy's central bank governor said in Rome on Tuesday that recovery needed a shared determination to advance towards a fully fledged European Union.
"In the current stage, the test of our resolve is the building of an effective Banking Union," Ignazio Visco said.
But a senior euro zone official said that when it comes to the banking union, the emphasis in priorities has shifted.
"There's a feeling now that if it takes another year or two to get the right ingredients in place, that's fine. Better to go slowly and get it right than rush it and get it wrong," the official said.
The finance ministers' talks in Vilnius are likely to include only an initial discussion of a July proposal by the EU's executive Commission on how to set up the single European resolution mechanism, officials preparing the meeting said.
Euro zone leaders see no deal on the resolution agency until December, after which talks will start with the European Parliament. First reactions to the July proposal showed it was unlikely to fly, because it names the Commission as the pan-European resolution agency - a move some governments, including Germany, believe would give the EU executive too much power.
Germany, which has elections this month, also believes that to set up a European resolution agency, the EU needs to change its fundamental law, a lengthy and risky process. The Commission believes no such change is necessary.
Before the ECB can take over as supervisor, it needs to know how healthy euro zone banks really are. Ministers will discuss, but not decide, how to prepare for an assessment of the value of bank assets in a review due next year, after which they may have to find money to recapitalise any lenders deemed to be weak.
Policymakers hope a banking union will not only help prevent another crisis but quickly boost economic growth and put public debt on a sustainable path, especially in the weakest countries, by making banks more willing to lend at affordable rates.
Business loans in bailed-out Greece, Cyprus or Portugal are often two or three times as costly as in France or Germany.
The ministers will also discuss more direct ways to boost lending to companies, spelled out by the Commission and the European Investment Bank in June, which could generate between 55 and 100 billion euros of new loans.
Additional reporting by Luke Baker in Brussels and Ingrid Melander and Leigh Thomas in Paris; Editing by Catherine Evans