(Bloomberg) -- German Finance Minister Olaf Scholz’s plan to break the deadlock over European banking integration received a cold welcome from his Italian counterpart, who rejected a key pillar of the proposal.

Italy remains opposed to stricter rules on banks’ sovereign debt holdings, Roberto Gualtieri told reporters in Brussels ahead of a meeting of euro area finance ministers. “We do not think that this is a condition that is appropriate for the completion of banking union,” he said, referring to the euro-area’s seven-year old push to cut the link between banks and their home countries.

Scholz made a splash on Wednesday by tabling a plan on how to move ahead with the project, which has pitched fiscally conservative northern European countries against their neighbors in the south, and smaller euro-area countries against bigger ones. Germany has been one of the staunchest opponents of moving ahead with the key missing part of the project, a joint form of guaranteeing deposits of European banks.

According to Scholz’s plan, which wasn’t agreed with the rest of Chancellor Angela Merkel’s government, Germany would be ready to consider more cooperation on guaranteeing deposits. The offer came with a list of demands aimed at reducing risks in the European banking sector and which have proved highly divisive in the past -- including limits on how much debt of any single country banks should be allowed to own without making provisions.

Gualtieri’s comments highlight the kind of entrenched positions that Scholz needs to overcome in order to unlock discussions. Countries with higher public debt levels like Italy and Spain have long rejected any restrictions on banks’ sovereign-debt purchases as it would rein in reliable buyers of their bonds.

Politicians are under increasing pressure from chief executives, supervisors and central bankers to strike down remaining barriers for cross-border banking. Two pillars of the banking union have been put in place: Supervision of the biggest lenders by the European Central Bank, and a new framework for failing institutions. Much of the rest, including more flexibility for internationally active banks, has been mired in conflict.

Earlier on Thursday, Scholz said his initiative could alter the debate by shifting the focus to concrete ideas. “I’ve made a proposal which I’ve worked on for a long time, and I am now putting it up for political discussion, in our own land and of course everywhere else,” he said. “That is the basis for progress.”

Bank Mergers

A more closely-knit banking market in Europe could pave the way for cross-border mergers, which could help the region’s beleaguered lenders become more profitable. On top of national fragmentation, EU banks -- not least German giants Deutsche Bank AG and Commerzbank AG -- are suffering from negative interest rates and a slowing economy.

Scholz’s plan was a “great contribution,” Eurogroup President Mario Centeno said. Support for measures like joint deposit insurance “is something that we build step by step, meeting after meeting, document after document.’’

Austrian Finance Minister Eduard Mueller, whose country has traditionally supported Germany’s cautious approach to sharing risks, said Scholz’s position is one that “we support for the most part.” However, “there are issues that have to be solved” before “dynamic should be increased,” he said.

Euro-area officials are due to hold further talks in the coming weeks, before another meeting of ministers in December at which decisions on the way forward could be taken.

--With assistance from Maria Tadeo, Alessandro Speciale, Joao Lima and Viktoria Dendrinou.

To contact the reporters on this story: Alexander Weber in Brussels at aweber45@bloomberg.net;Katharina Rosskopf in Frankfurt at krosskopf@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Chris Reiter, Nikos Chrysoloras

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