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By Jan Strupczewski and Krista Hughes
WASHINGTON (Reuters) - The European Union can and should go ahead with setting up a system for winding down banks without trying to change EU law to give the bank resolution mechanism a stronger legal basis, senior bloc officials said on Thursday.
German Finance Minister Wolfgang Schaeuble said last Saturday that completing the European banking union would require changes to EU treaties, in a call that could slow completion of the plan designed to underpin the euro currency.
But EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview changes to EU treaties were more a longer-term goal than a condition for banking union to operate.
"The commission's view and our lawyers' opinion is that we can construct the elements of a successful banking union, including the single resolution mechanism and rules for direct recapitalization of banks, without a treaty change," Rehn said.
"I see that discussion - on treaty change - is part and parcel of a long-term reconstruction of the economic and monetary union. But it is not a condition to agree on a single resolution mechanism or rules for direct recapitalization of banks," he said.
"We do not consider it as a condition, but rather a longer term objective, as a longer-term process in the framework of the reconstruction of the Economic and Monetary Union."
To break the vicious circle of weak sovereigns and weak banks, the euro zone is working on rules that will allow its bailout fund, the European Stability Mechanism, to directly recapitalize solvent banks when they cannot get the necessary funds from shareholders or from the government.
But the direct recapitalization option, while endorsed by EU leaders, is also running into opposition in Germany, Finland and the Netherlands, where public opinion is against using euro zone taxpayers' money to rescue banks in other countries.
While Austria backs Germany on the need to change EU law to complete the banking union, the euro zone's second biggest economy, France, was against it.
"We must go as far as possible without treaty change and consider whether ... that is necessary," French Finance Minister Pierre Moscovici told a seminar on the sidelines of a meeting of the world's financial leaders in Washington.
"The idea of a treaty change, which is never popular in Europe, must not be used as a pretext to stop banking union," he said. "If necessary we can have one. But it has to be necessary and technical because it's clear people are not very fond of huge treaty changes; we've had a lot in the last years."
"We want a full banking union and we want it fast."
The euro zone banking union aims to shore up the euro zone by breaking the "doom loop" between ailing banks and state finances. As a first step, the European Central Bank is set to start supervising euro zone banks from July 2014.
The second step is to replace a coordinated national system for resolving banks with a common euro zone mechanism that in the early stages would have the financial backing of the euro zone bailout fund - which means euro zone taxpayers.
Eventually, the system would become fully financed from accrued fees paid by euro zone banks.
Germany, which faces elections in September and where there is large bailout fatigue, is concerned that until there is enough money from bank fees, euro zone taxpayers would be liable footing the bill for reckless lending by foreign banks.
(Reporting by Jan Strupczewski; Editing by Tim Ahmann)