By Tom Fairless

Germany is once again at loggerheads with the European Union over a key plan to exit the region’s three-year-old debt crisis and who should pay when things go wrong.

This time, the disagreement centers on a new resolution fund, which most observers believe is necessary to accompany a planned EU bank-resolution mechanism. Such a fund would help cover the costs of orderly restructurings or winding down of banks, compensating creditors that can’t be “bailed in” without creating major upheavals or setting up a bridge bank for a closed lender’s “good” assets.

Proponents of strong “banking union” – the EU’s broader effort to sever the toxic link between troubled banks and their governments – say that such funding needs to be shared among the union’s members. Restructuring and resolution costs, they argue, can easily overwhelm national governments, especially at a time when no country has a sufficiently strong industry-financed fund.

Michel Barnier, the EU commissioner in charge of the file, appeared to delve right into this issue last week, taking what seemed like a pretty clear position: Europe should have “a common resolution fund … for those countries which belong to the banking union,” he said at a conference on banking regulation.

That declaration didn’t go down so well with German Finance Minister Wolfgang Schäuble. On Saturday, just after his EU colleagues had announced their breakthrough on a single banking supervisor — one of the other “pillars” of banking union — Mr.  Schäuble threw another wrench in the gears.

A European mechanism to wind down banks isn’t possible under current EU treaties, he told journalists.

“A banking union naturally only make sense when, next to rules on capital and a single supervisor … we also have corresponding mechanisms for restructuring and resolution,” Mr. Schäuble said. “But if we want European institutions there, we need treaty changes.”

Germany’s concern is that a central resolution mechanism will need a much more solid legal footing than a single supervisor, because its actions would incur frequent legal challenges from investors, and might involve taxpayer money. German officials complain that the EU treaty in its current form won’t provide a watertight legal basis for a bank-resolution mechanism.

“We won’t be able to take any steps on a questionable legal basis,” Mr. Schäuble warned.

Crucially, Germany is happy to push ahead with a European resolution system — provided it is limited to coordinating national systems, rather than setting up a single fund that would force lenders in rich countries, or their governments, to foot the bill for problem banks in their poorer neighbors.

“It’s crucial that we strengthen the network of national restructuring authorities and funds,” Mr. Schäuble said.

The strong German pushback seems to have triggered some semantic scrambling. A “common” fund need not necessarily mean a “single” fund, people close to the European Commission said this week, adding that the EU’s executive if is still considering the matter.

The commission may propose a network of funds with clear rules on how they can dip into one another, the people said.

Mr. Barnier also believes the current treaty provides sufficient legal cover for such a fund. On Thursday, the commissioner said his proposal, which is due in June, would be “on the basis of the current treaty.”

It isn’t yet clear how the commission will resolve the semantic puzzle. Either way, the timeline looks increasingly tight. Negotiations won’t begin in earnest before Germany’s federal election in September, and will grind to a halt by March next year, when lawmakers start canvassing for elections in May.

Meanwhile, the final pillar of banking union—common insurance for bank deposits—has been kicked deep into the long grass. Jens Weidmann, head of Germany’s influential Bundesbank, told The Wall Street Journal this week that banking union actually only consists of two pillars, a single supervisor and a resolution mechanism. How stable that construct will be remains to be seen.