In blatant violation of the Maastricht Treaty, the European Commission has come forward with one bailout plan after anotherfor Europe’s distressedeconomies. Now it wants to socialize not only government debt by introducingEurobonds, but also banking debt by proclaiminga “banking union.”

Socializing bank debt is both unjustand will result in a future misallocation of resources. Socialization of bankdebt across borders implies that a country’s private borrowing costs areartificially reduced below market rates, as insurance (in the form ofcredit-default swaps) is provided free of charge by other countries. Thus,capital flows from the core to the periphery would continue to exceed theoptimal amount, undermining growth for Europeas a whole.

History offers countless examples of the misallocation of resources thatcan result from socialization of bank debt. One is the 1980’s savings and loan crisis in the United States,which cost US taxpayers more than $100 billion. Under the umbrella of commondeposit insurance, US savings banks made a “gamble for resurrection”– borrowing excessively from their depositors and lending the money out torisky enterprises, knowing that potential profits could be paid out asdividends to shareholders while potential losses would be socialized.

In other words, private profits were generated out of socially wastefulactivities. And essentially the same happened with US subprime mortgage lending andwith the Spanish banking system in the 2000’s. In both cases, banks took excessive risks inthe expectation – eventually vindicated – that governments would bail them out.

Spanish banks speculated on a continuing increase in real-estate prices,which would bring large capital gains to their customers. Indeed, they oftenlent homeowners more than 100% of the underlying property’s value. Tocompensate for the damage that their reckless behavior caused, they received