The European Union announced a €100 billion bailout of the Spanish banking system today that could be a watershed moment in the evolution of the eurozone into a more workable system.
The key point is that though Spain will still have to abide by its existing austerity-oriented fiscal commitments, there are no new strings attached in terms of supervision of Spanish fiscal policy by Brussels, Frankfurt, or Berlin. That’s contrary to the precedent set in the earlier bailouts of Ireland, Greece, and Portugal and contrary to commitments made previously by Angela Merkel and the leaders of some of the smaller European countries when they created the bailout funds that are being used. The political loophole being invoked is that this is money for the exclusive purpose of shoring up Spanish banks, and not general operating support for the Spanish government.
If that’s the line that works politically in the Bundestag, then good for Europe’s leaders for working it out. In the real world, of course, ponying up money to do something the Spanish government would otherwise need to do on its own is a form of general support for the Spanish government.
But the new precedent contains a lot of promise. One key difference between the US and the European Union is that deposit insurance is a federal function in the United States. That means that if the economy gets really really bad in Florida and a disproportionate number of Florida banks fail, the United States as a whole bails out the depositors. If responsibility for Florida bank failures rested exclusively with the state of Florida, then bankruptcies of Florida banks could end up bankrupting the state. That’s essentially what was happening in Spain. It was a bad system, not just for Spain in this particular case but for the eurozone as a whole. Since we don’t operate a cash-in-advance economy, the question of money is fundamentally tied up with the question of banking. A political unit that’s going to use the same currency needs some kind of overall banking supervision and a common approach to deposit insurance. An ad hoc bailout of Spanish banks isn’t the same thing as an EU-wide banking union, but it is a step in that direction.