It’s not happening. Leaders of the euro zone country members seemed to have reached an accord last June 29 over the imperative to break up the heavy chain that links banking risk to sovereign debt. Yet, for all the solemn speeches, the plans look now idle.
Particularly for the Spanish government, the diplomatic success it achieved then, joined by Italy, has vanished. When presidents Mariano Rajoy and Mario Monti talked about Banking Union, Germany’s Chancellor Angela Merkel and her Finance minister Wolfgang Schauble did not exactly listen to them. Not only the schedule of the move to banking sector integration is being delayed, but even the very concept of Banking Union has suffered a persistent watering down from Germany and its allies.
It was the banking crisis in Spain that triggered since the beginning of the year most of the country’s problems, and pushed it on to the spot of global attention in the euro crisis stage. The Spanish banks’ capital needs were exaggerated amid market fears and sovereign debt disinvestment. Market confidence dropped and credit costs rose, paralysing a government that cannot apply any monetary policy on its own.
To stop that contagion we must establish a true Banking Union: a common supervisor that ensures euro zone entities are sound, a deposit guarantee fund to stop capital flight, and a last-resort lender to rescue troubled banks. Madrid would have activated the European Stability Mechanism precisely to free the state sheet balance from the bank rescue weight.
But throwing this debt into an already towering public debt per GDP rate, against the background of a weak economy, will increase market distrust. Ratings agency will downgrade Spain further. This is the description of a perfect trap.
Unfortunately, Berlin has rejected the Banking Union project. The German government would only admit a partial supervision–on systemic banks–, with no common deposit guarantee fund and with no direct lending to bailout banks until the euro zone has set a financial union that would necessarily take many years.
Audits of the Spanish banks by Oliver Wyman should have been celebrated after it was revealed that Spain would require some €40 billion, much less than feared. However, core euro countries aren’t willing to fix the design of the common currency union and risk their taxpayers’ cash in the endeavour. The longer they avoid to face their responsibilities, though, the harder all euro area economies will be hit. Markets never forgive.