There are six main requirements for a functioning banking union. The most difficult ones to implement for the Eurozone will be those requiring German (and FANG) money, specifically a depository insurance scheme and resolution authority.
The Germans remained determined not to pay for a true banking union. The latest draft on resolving failing banks requires distressed countries to add to their debt loads to bailout their own banks. Countries that do not require a bailout will be forced to inject cash into their failing banks before the ESM contributes its money. Insolvent countries would be able to obtain ESM aid for the banks but would indemnify the ESM against losses.
In either case a country will be forced to add debt to its balance sheet to bailout its banks just like Spain did this fall and Ireland did two years ago. The proposal does not break the link between governments and their financial systems so that a banking crisis will continue to metastasize into a full-blown sovereign debt crisis.
Interestingly, this policy will not be officially issued until June. If one is optimistic, he may conclude that the policy will be altered before then to break the perilous sovereign-bank link. Realistically, the long wait is another example of the dilatory tactics being employed by the Germans before elections. Anything that has the potential of costing Germany a lot of money will be pushed back until after elections are held in the fall. In the meantime, Spain will be adding to its deficit to continue shoring up its insolvent banking system.
While the EU is not counting the cost of this bank bailout against Spain’s budget deficit for purposes of its austerity plan, it still counts in real financial terms. Spain is rapidly running out of road for can kicking.