Spain and Bank Runs


Paul Krugman explains why Spain likely neither will nor should leave the Euro:

Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway — which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain — it’s hard to see any Spanish government taking the risk of “de-euroizing.”

I suppose one issue is this: Having read this column, if I had a Spanish bank account I’d now be looking for feasible ways to minimize the amount of funds in it. And once everyone starts hedging against a bank run, your bank run is under way.

The larger question posed here is whether it really makes sense to be running separate national banking systems parallel to a single continent-wide monetary authority. A regulatory system that works fine until there’s a problem doesn’t really work at all.