Both mistakes can be corrected. With regard to the first, emergency funds ought to be used to recapitalize banking systems as well as to provide loans to sovereign states. The former would be a more efficient use of funds than the latter. It would leave countries with smaller deficits, and they could regain access to the market sooner if the banking system were properly capitalized. It is better to inject equity now rather than later and it is better to do it on a Europe-wide basis than each country acting on its own. That would create a European regulatory regime. Europe-wide regulation of banks interferes withnationalsovereigntylessthanEuropeancontroloverfiscalpolicy.AndEuropeancontroloverbanksislessamenabletopoliticalabusethannationalcontrol.
With regard to the second problem, the interest rate on rescue packages should be reduced to the rate at which the EU itself can borrow. This would have the advantageofdevelopinganactiveEurobondmarket.
These two structural changes may not be sufficient to provide the countries in need of rescue with an escape route. Additional measures, such as haircuts on sovereign debt, may be needed. But having been properly recapitalised, banks could absorb this. In any case, two clearly visiblemistakesthatcondemntheEUtoableakfuturewouldbeavoided.