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March 27 (Bloomberg) -- Luxembourg warned that the European Union risks hurting financial stability if it moves to isolate banking systems within national borders.

“Luxembourg will therefore not adhere to policies that intend to renationalize elements of the single market,” the government said in an e-mailed statement.

The Luxembourg statement counters recent remarks from Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance ministers, that countries need to rein in their banking sectors or face EU consequences. “Push them back. You deal with them,” Dijsselbloem said this week in comments on how the EU should respond to banks in trouble.

Dijsselbloem’s comments in an interview with Reuters and the Financial Times, made after the euro area approved a bailout program for Cyprus that included imposing losses on uninsured bank deposits, roiled markets already bracing for the potential of capital flight from the island.

Asked about the implications of a policy of “pushing back the risks” on banks for countries including Luxembourg, Dijsselbloem said: “It means: deal with it before you get in trouble. Strengthen your banks, fix your balance sheets, and realize that if a bank gets in trouble, the response will no longer automatically be we’ll come and take away your problems.”

Countries shouldn’t be judged solely on the size of their banking sectors in relation to gross domestic product, nor should they be penalized for the business model of international finance, according to the Luxembourg statement.

‘Restrictive Approach’

“As a matter of principle, Luxembourg is therefore concerned about recent statements and declarations that were made since the crisis in Cyprus,” the government said. Luxembourg said it supports the Cyprus program while disagreeing with comments accompanying the rescue effort.

Banking systems should be judged by their quality, “solidity” and size relative to the euro area as a whole, Luxembourg said. A more “restrictive approach” runs counter to the EU’s single market and toward the currency bloc’s move to establish common banking supervision.

“It is precisely also in this spirit that Luxembourg has agreed to establishing a fully fledged banking union in the euro area, starting with common supervision, but inevitably leading to guarantee deposits and a common resolution mechanism,” the Luxembourg statement said.

EU lawmakers and national governments on March 19 agreed on a provisional deal to turn the European Central Bank into a supervisor for banks in the euro zone and other willing nations. The EU also is working on proposals to standardize procedures for insuring deposits and shutting down banks, and proposals for a common bank resolution framework are due later this year.

To contact the reporter on this story: Rebecca Christie in Brussels at

To contact the editor responsible for this story: James Hertling at

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