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Even Germany doesn't rule out allowing European bailout funds to inject capital directly into banks rather than channelling funds via national governments. But will governments be willing to make the necessary sacrifices of sovereignty to make this idea work?
Can Madrid be trusted to enforce decisions demanded by external regulators if these clash with domestic political priorities? For example, a pan-European regulator might demand that Madrid wipe out all current Bankia shareholders and preference shareholders before it receives a cent of eurozone bailout funds, even if that means imposing heavy losses on unsuspecting retail investors.
Nor is this just a Spanish problem: Others would no doubt like to unload their banking problems, including those such as Ireland that have already incurred debts from earlier bailouts. Many European banking problems stem from an unhealthy relationship between banks and politicians, with small institutions controlled by local politicians channelling soft loans to pet projects. Using eurozone bailout funds to inject capital directly into banks might ease the current market pressure, but if it also takes the pressure off politicians to overhaul a failed banking model, it will only store trouble for the future.
That isn't to say these obstacles can't be overcome, or that overcoming them doesn't offer the eurozone's best way out of the crisis. But Spain and its allies calling for direct bank recapitalisations have a duty to spell out exactly how they propose to address the rest of the eurozone's legitimate concerns.
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