Madrid’s role in the financial crisis has the erratic quality of Dr Jekyll and Mr Hyde. It has veered unpredictably between embodying the euro’s greatest threat and pushing the reforms the monetary union badly needs. It is vital that the deal on eurozone financial assistance for Spain’s banks should be a step to a permanent solution and not a redoubling of past mistakes.
It is good that the agreement activates a new power granted to Europe’s rescue funds last year. Madrid will borrow money not for its main budget but for the Frob, its bank bailout fund. The assistance will be limited to the banking system, without Spain entering a programme subject to the eurozone-International Monetary Fund troika. This reward for genuine commitment to austerity and structural reform will hopefully prevent relations with Europe from becoming as poisoned as in some other countries.
The key dysfunction of the euro, however, is not addressed. Rather than sever the lethal embrace between stressed sovereign debt and weak banking systems, a cash advance to bail out banks with taxpayer funds adds to the burden of Madrid’s public finances. If the state of Spanish banks is much worse than expected, this action could amount to lending the country rope with which to hang itself – repeating the Irish mistake.