UniCredit’s pursuit of Commerzbank is a defining moment for Europe

The latest European bank takeover battle is widely seen as a potential turning point for the region – particularly the bloc’s incomplete banking union.

Italy’s UniCredit has stepped up pressure on Frankfurt-based Commerzbank in recent weeks, seeking to become the biggest investor in Germany’s second-biggest lender with a 21 percent stake.

The Milan-based bank, which took a 9% stake in Commerzbank earlier this month, appears to have caught German authorities by surprise with its potential multibillion-euro merger.

“The much-discussed move by UniCredit, Italy’s number one bank, to seek control of Germany’s Commerzbank is a landmark for Germany and Europe,” said David Marsh, president of London-based OMFIF, an organization that watches the central bank and economic policy. Tuesday in a written comment.

Regardless of the outcome of UniCredit’s attack on Commerzbank, Marsh said the episode marks “another huge test” for German Chancellor Olaf Scholz.

The German leader strongly opposes the apparent takeover attempt and reportedly described UniCredit’s move as an “unfriendly” and “hostile” attack.

“The dispute between Germany and Italy over UniCredit’s takeover maneuvers – described by Scholz as an unfriendly act – threatens to inflame relations between two of the three largest EU member states,” Marsh said.

“A compromise could still be found,” he continued. “But the hostility brewing in Italy and Germany could derail any meaningful steps towards completing the banking union and integrating capital markets, which all sides say is needed to pull Europe out of the malaise.”

Conceived in the wake of the 2008 global financial crisis, the European Union’s executive arm announced plans in 2012 to create a banking union to ensure the region’s lenders are stronger and better supervised.

The project, which became a reality in 2014 when the European Central Bank took on the role of banking supervisor, is widely considered incomplete. For example, the lack of a European Deposit Insurance System (EDIS) is one of a number of factors that have been cited as a barrier to progress.

European leaders, including Germany’s Scholz, have repeatedly called for better integration in the European banking sector.

OMFIF’s Marsh said Germany’s opposition to UniCredit’s move on Commerzbank meant Berlin “is now accused of favoring European banking integration only on its own terms”.

A German government spokesman did not immediately respond when contacted by CNBC for comment.

Hostile takeover bids are not common in European banking, although Spanish bank BBVA shocked markets in May when it launched an all-share takeover bid for local rival Banco Sabadell.

The head of Banco Sabadell said earlier this month that BBVA was highly unlikely to succeed in its multibillion-euro hostile bid, Reuters reported. And yet BBVA CEO Onur Genç told CNBC on Wednesday that the takeover is “moving according to plan.”

Spanish authorities, which have the power to block any merger or acquisition of a bank, have expressed opposition to BBVA’s hostile takeover bid, citing potentially damaging effects on the county’s financial system.

Mario Centeno, a member of the European Central Bank’s Governing Council, told CNBC’s “Street Signs Europe” on Tuesday that European policymakers have been working for more than a decade to establish a “real banking union” — and continue to do this.

The unfinished draft means the banking crisis intervention framework continues to be an “awkward mix” of national and European authorities and instruments, according to Brussels-based think tank Bruegel.

Asked if comments against banking consolidation from leading politicians in both Germany and Spain were a source of frustration, the ECB’s Centeno said: “We have worked very hard in Europe to complete the banking union. There are still some issues with the table, which we all know.”

Thomas Schweppe, the founder of Frankfurt-based consultancy 7Square and a former Goldman M&A banker, said Germany’s decision – intentional or not – to sell a small 4.5% stake in UniCredit earlier this month meant that the bank is now “in play” for a potential takeover.

“I think we’re proposing, you know, a European banking landscape, and also in Germany, they’re supporters of strong European banks that have a good capital base and are well managed,” Schweppe told CNBC’s “Squawk Box Europe” Wednesday.

“If we are serious about this, I think we have to accept that European consolidation also means that a German bank becomes the acquired party,” he added.

Asked for a timeline on how long the UniCredit-Commerzbank saga will last, Schweppe said it could last months, “if not a year or more.” He cited a lengthy regulatory process and the need for discussions among all stakeholders to find an “acceptable” solution.