The European Commission has discreetly proposed to have member states make good the losses of private banks before they are recapitalised with eurozone rescue funds. If the currency union accepts this principle, it will definitively break its promise to pry apart the lethal embrace between banks and sovereigns – and jeopardise the calm that this vow imparted to markets.
Last June the European Council belatedly accepted the danger that a country’s sovereign debt and the debts of its private banks drag one another down. Leaders’ new-found understanding of the problem and their seeming intent to do something about it eased pressure on Spain, which secured a eurozone rescue package for its banks shortly afterwards. It also bettered credit conditions for Ireland, which was promised that “similar cases will be treated equally”.
Germany and a rump of other creditor countries have since tried to claw back this concession to financial reality by rejecting the use of European Stability Mechanism funds directly to recapitalise banks damaged by the crisis. What once looked like a tactical stance to secure German preferences on a banking union deal now looks like a substantive demand. To have caved in to this pressure disgraces the commission.