German authorities are stunned by UniCredit's operation against Commerzbank

Italian bank UniCredit appears to have taken German authorities by surprise with a possible multi-billion-euro merger with Frankfurt-based Commerzbank, a move that has prompted a harsh response from Berlin.

Market observers told CNBC that the deal may have sparked a sense of national embarrassment in the German government, which is staunchly opposed to the move, while it has been argued that the outcome of the takeover attempt could even jeopardize the meaning of the European project.

Milanese bank UniCredit announced on Monday that it had increased its stake in Commerzbank to around 21% and filed an application to increase that stake to 29.9%. This decision comes after UniCredit took a 9% stake in Commerzbank earlier this month.

“If UniCredit can take Commerzbank and bring it up to its level of efficiency, there will be a tremendous benefit in terms of increased profitability,” Octavio Marenzi, CEO of consultancy Opimas, told CNBC's “Squawk Box Europe” on Tuesday.

“But [German Chancellor] “Olaf Scholz is not an investor. He is a politician and he is very concerned about the employment aspect. And if you look at what UniCredit has done in terms of cost reduction in its Italian operations or in particular in its German operations, it has been quite impressive,” Marenzi said.

Scholz on Monday criticised UniCredit's decision to raise its stake in Commerzbank, describing the move as a “hostile” and “unfriendly” attack, Reuters reported.

Commerzbank Vice Chairman Uwe Tschaege on Tuesday spoke out against a possible takeover by UniCredit. Speaking outside the bank's headquarters in central Frankfurt, Tschaege said the message was clear and simple: “We don't want this.”

“I feel like vomiting when I hear their cost-saving promises,” Tschaege added, referring to UniCredit CEO Andrea Orcel.

Separately, Commerzbank supervisory board member Stefan Wittman told CNBC on Tuesday that up to two-thirds of the bank's jobs could go if UniCredit successfully pulls off a hostile takeover.

The bank has not yet responded to a request for comment on Wittmann's statement.

Hostile takeover bids are not common in the European banking sector, although Spanish bank BBVA surprised markets in May when it launched a takeover bid for local rival Banco Sabadell. The latter Spanish bank rejected the offer.

Opimas' Marenzi said the German government and unions “are basically looking at this and saying this means we could lose a lot of jobs in the process, and they could be quite substantial job losses.”

“The other thing is that there could be a bit of national embarrassment because the Italians come and show them how to run their banks,” he added.

A German government spokesman was not immediately available when contacted by CNBC on Tuesday.

Scholz from Germany has previously Pushed for a European banking union. The executive arm of the European Union, designed in the wake of the 2008 global financial crisis, announced plans to create a banking union to improve regulation and supervision of lenders across the region.

Craig Coben, former global head of capital markets at Bank of America, said the German government would have to find “very good” reasons to block UniCredit's move on Commerzbank, warning it would also have to be consistent with the principles of European integration.

“I think it's very difficult for UniCredit to acquire or do a deal for Commerzbank without the approval of the German government, just as a practical matter, but I think Germany needs to find a legitimate excuse if it wants to intervene. [or] “If he wants to block UniCredit's approach,” Coben said on CNBC's “Squawk Box Europe” on Tuesday.

“Germany has joined the [EU’s] single market, has joined the single currency, has joined the [the] banking union and it would therefore be incompatible with those principles to block the merger on grounds of national interest,” he continued.

“And I think that's really what's at stake here: what is the meaning of [the] Banking union? And what is the point of the European project?

Former president of the European Central Bank Mario Draghi In a report published earlier this month, the European Union needs hundreds of billions of euros in additional investment to achieve its key competitiveness goals.