Banking Disunion

BARCELONA – The line of credit to Spain from fellow eurozone governments may help to stabilize a fragile banking system, at least in the short term, but it is a missed opportunity. Spain’s banking crisis provides a perfect opening to move towards a European banking union.

In the medium term, help to Spain will merely reinforce the link between the sovereign and the banks’ problems, causing even greater fragmentation in the European banking market and pushing Spain closer to potential insolvency by increasing its debt burden. By contrast, a direct equity stake in Spanish banks taken by an appropriate eurozone investment vehicle would decouple bank and sovereign risk. It would represent a decisive step toward unified European banking supervision, which could imply easier liquidation of non-viable institutions.