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When the issue of a European banking union was first publicly raised three weeks ago, most people focused on a potential clash between France and Germany.

Germany has stated many times that steps must be taken towards a fiscal union before a banking union. For its part France, in pushing for banking union as a first step, seems to be looking to mutualise liabilities, effectively leaving the Germans jointly responsible for its own and other eurozone debts. In this way France avoids being put in a fiscal strait-jacket.

Until now, such underwriting of liabilities, which this would in effect represent, has been part of bail out arrangements involving enforced austerity measures set at European level and overseen by the IMF, European Commission and ECB. Germany continues to demand that any ‘fiscal implications’ be proportionately reflected in the say of those who ultimately pay.

With the eurozone perilously close to the edge, the EU finds itself in a “chicken and egg” moment.

German leadership must be concerned when renowned and respected commentators argue that banking union is in itself a first step towards fiscal union. Add to this the Greek elections and the potential impact of a negative outcome on the borrowing ability of countries such as Spain and Italy, and such concern may be turning to anguish as Germany’s negotiating hand is forced by the need to act fast. 

After all, a major factor in all EU negotiations and horse-trading is who blinks first and starts moving towards a compromise.

No doubt, Berlin is under huge pressure. It looks increasingly likely that, due to the crisis closing in on the larger Member States, Germany may back moves on banking union, and this will have knock on implications for specific financial services dossiers currently under negotiation in Brussels.

The immediate and most relevant ones include the wider ongoing discussions on European supervision of banks and financial institutions, deposit guarantee schemes, and the long awaited crisis management legislation, or Bank Resolution and Recovery framework. This is because the substantive issues in these proposals are key elements of a nascent banking union.

The latter, proposed by the Commission last week, was notably light on the elements concerning mutual responsibility for failing banks which would have pleased Germany.

Ironically, the issue of 'more Europe', which has been seen as an obstacle to agreement for financial services negotiators over the past three years, appears to be part of the solution for the broader Euro crisis. Germany has opposed agreeing to legislative measures in relation to financial services which would amount to underwriting liabilities. This is a fundamental objection, and the main reason why it is seeking fiscal union before the establishment of a banking union. 

Indeed, what holds up such negotiations is differing views on the centralisation of responsibilities, liabilities and supervisory powers, leaving Member States and the Commission burning the midnight oil in last ditch efforts to sew together political compromise agreements. 

Germany and the UK in particular have zealously guarded against any transfer of fiscal sovereignty by refusing to agree to any design for a European supervisory mechanism which may hold 'fiscal implications'. That is a technocratic euphemism. Even when the most globally active and cross-border financial institutions fail, they are national insofar as the externalities only impact the domestic tax payer. For instance, when Northern Rock failed, it seemed natural that it had to be bailed out by the UK. When Dexia, a Franco-Belgian bank which operated across several Member States failed it had to be rescued by the French and Belgian states. There was zero political will for other Member States, whose citizens would be impacted as depositors, to assist in the rescue.

The latest European banking problem, involving Spain’s Bankia, shows that the political dynamics are changing.

Whether or not banking union is accepted as the first step towards greater fiscal union is an interesting question. And it is one which will continue to divide the major protagonists.

However, what has gone unnoticed so far is the fact that somewhere down the line the Germans, in accepting direct European supervision for systemically important or cross-border banks, appear to have already conceded the fiscal implications argument: Germany seems to be willing to accept paying for the bail-out of German banks active across Europe, without having the ultimate say in how those entities are supervised at the European level.

That should be considered a crucial first step in itself.