The rescue package of EUR 100 billion to fund the Spanish government to recapitalise its zombie banks does nothing to address the two great flaws of the Euro. Both these flaws could be potentially fatal.
Flaw No 1: Lack of fiscal union or confederation
Flaw No. 2: Lack of a credible lender of last resort often referred to as absence of a banking union.
The Greek crisis has been a stark manifestation of the first flaw. The crisis in Spain is a manifestation of the second flaw.
A lot has been said and discussed about the need to impose budgetary discipline through a fiscal union to avoid Greek style sort of fiscal recklessness. But even a fiscal union on its own will not be sufficient to restore stability in the Euro system. Without a common banking system with a single regulator and a central lender of the last resort the problems will recur.
An integrated banking system would require three conditions:
1. a single lender of last resort and a single provider of rescue capital at a Euro area level.
2. A single Euro area financial regulator to provide an appropriate counter-point to the single source of capital/liquidity.
3. The Euro regulator must have the ability to close financial institutions as it considers appropriate even overruling the wishes of the national governments on such matters.
The Spanish bank bailout has not made any contribution for the achievement of these objectives. The political obstacles that must be overcome for the achievement of such union are formidable. It involves a system where banks in one country can claim revenues from another country. It means a French Bank being closed down by a non-French regulator against the wishes of the French government.
How are Euro area governments, let alone their people, going to accept that their tax revenues be used to make good for the failures of other Euro countries who choose to retire at 60 as against say 67 as in Germany and Netherlands?
So a banking union and a fiscal union are only feasible if there is a plan for a full political union where social services are also harmonised.
Are Europeans ready for that? And if not how can we continue with the current system where banks are no longer lending to each other and the ECB is more and more becoming the clearing house for inter-bank liquidity where banks that do not trust each other use the ECB to carry the counter-party exposure risks they are unwilling to carry.
Yet governments in Europe are not preparing their citizens for the large and urgent compromises that have to be made to take the EU to the next level of integration. Failure to do so would give rise to extreme movements, of the left and of the right, who are already making their presence felt through the democratic process of elections. Such extreme forces once they obtain power through democratic channels are generally apt to stop playing by the rules of democracy and protect their newly acquired power through non-democratic means. Is next Sunday's election in Greece the spark to start the fire?
Something has to give and pretty soon.