One reason the euro zone is in such a mess is that it hasn’t had the courage to clean up its banks. The United States gave its lenders a proper scrubbing, followed by recapitalisation, in 2009. By contrast, the euro zone engaged in a series of half-hearted stress tests that missed many of the biggest banking problems such as those in Ireland, Spain and Cyprus.
In recent years, the zone has started to address these problems on a piecemeal basis. But it is still haunted by zombie banks, which are not strong enough to support an economic recovery.
The European Central Bank now has a golden opportunity to press the reset button in advance of taking on the job of supervisor in mid-2014. It mustn’t flunk the cleanup.
Mario Draghi, the ECB president, is alive to the opportunity and the threat. His fear is that, even if the supervisor does its job properly, there won’t be a safety net for troubled banks that can’t recapitalise themselves. This is why he called on governments last week to make an explicit commitment to provide such a “backstop”.
Draghi highlighted the contrast between the U.S. stress test, in which Washington committed to plug any balance-sheet holes, and the last European stress test conducted by the European Banking Authority in 2011 which lacked such a commitment by governments. The U.S. test launched its economy on the road to recovery; the EBA one triggered a new phase in the crisis.