London CNN Business  — 

Labor unions fear that a merger between Deutsche Bank and its smaller German rival Commerzbank could lead to the loss of 30,000 jobs. That’s just one reason it may never happen.

Germany’s largest bank confirmed Sunday that formal discussions are underway with Commerzbank (CRZBF). CEO Christian Sewing told Deutsche Bank (DB) employees he would only pursue options that make “economic sense.”

Buying Commerzbank would solidify Deutsche Bank’s position in Germany’s fractured retail banking market while satisfying politicians who want a national champion that can provide financing for German companies. The German government owns 15% of Commerzbank after a bailout in 2009.

But any combination would be opposed by the powerful labor unions and closely examined by EU regulators who may prefer a cross-border merger that could strengthen Europe’s financial system.

Investors are likely to fret over when promised cost savings would materialize, and whether acquiring Commerzbank would do anything to boost profits at Deutsche Bank’s struggling investment bank.

“The German government appears in favor of the merger, which could result in huge cost savings for the banks as both struggle to generate growth,” said Jasper Lawler, head of research at London Capital Group. “The question that comes to mind is whether combining two struggling banks would just create one larger ‘too big to fail’ struggling bank?”

Sunday’s announcement triggered immediate pushback from staff representatives, who occupy half the seats on Deutsche Bank’s supervisory board. A senior official at German union Verdi warned that one of every five jobs at the banks could be lost following a merger.

“Unfortunately we have to assume that in such a scenario … 10,000 jobs will be put at risk immediately, and as many as 30,000 in the long term, mainly in Germany,” the union’s head of banking, Jan Duscheck, told local media.

“From our perspective, this potential merger would not create a business model that is sustainable long term,” added Duscheck, who is a member of Deutsche Bank’s supervisory board.

Is bigger better?

Deutsche Bank and Commerzbank have been touted as merger partners for years, but speculation about a possible deal increased recently after a major restructuring at Deutsche Bank failed to boost earnings significantly.

Sewing, a retail veteran who took over as CEO last year, has been slashing jobs and branches in an effort to end years of losses. Critics say the plan hasn’t resolved longstanding questions over the future of Deutsche’s investment bank, which delivers volatile returns and has lost ground to Wall Street rivals. And the Frankfurt-based bank is still digesting its last big purchase, Postbank, dating back to 2010.

It posted its first annual profit since 2014 last year, but a dismal performance in the fourth quarter underscored the slow pace of progress and raised new questions about the investment bank. Shares in Deutsche Bank have lost about 75% of their value since 2015, and hit a record low in December 2018.

Deutsche Bank investors are running out of patience. A merger is one potential way forward; other options include a complete retreat from Wall Street (more likely) or major new investment in the investment bank (less likely).

Analysts at UBS wrote earlier this year that a merger between Deutsche Bank and its crosstown rival would need to come with “major additional restructuring efforts” such as headcount reductions “to be welcomed by the market.”

Sewing cautioned Sunday that “potential economic and technical factors” could block a deal. But he provided little clarity on his vision for a combination with Commerzbank.

“Our stated aim remains to be a global bank with a strong capital markets business –— based on a leading position in our home market in Germany and in Europe, and with a global network,” he wrote in a letter to employees.

Who wants a deal?

Sewing may find some support for a merger among European regulators who argue the region has too many banks. But pairing off with a bank in another EU state would have the added benefit of promoting financial integration in the bloc.

“Cross-border mergers would do more than just help the banking sector to shrink,” Danièle Nouy, chair of the European Central Bank supervisory board, said in a 2017 speech. “They would also deepen integration. And this would take us closer to our goal of a truly European banking sector.”

Still, investors appear to be willing to give Sewing the benefit of the doubt. Shares in Deutsche Bank advanced 4.5% in Frankfurt on Monday, while Commerzbank’s stock soared 6.5%.