EVEN by the standards of euro-zone bail-outs, which are greeted with applause but swiftly fizzle, the rescue of Spain's banks, announced on June 9th, was a disappointment. Relief in the markets lasted only hours. Yields on Spanish bonds soon started to rise. Within days they had reached their highest point since the introduction of the euro and a level that, if sustained, would tip Spain into insolvency. Ominously, yields also rose on German bonds, the euro area's haven. Investors are wondering whether the euro itself will survive.

The package has some good points. Compared with previous bail-outs—of Greece, Portugal and Ireland—the rescuers acted early. Spain's government was offered money to fix its banks before it was shut off from financial markets. The sum on offer is big: Madrid has been promised loans of up to €100 billion ($125 billion), enough to shore up its banks even if the economy shrinks a lot further. Though no details have yet been agreed on, the interest rate on the rescue funds will doubtless be well below the 6.7% that Spanish ten-year bonds reached this week. And unlike earlier rescues, this one comes without toxic demands for yet more austerity.

There's only one way out

A year ago, a proper clean-up of Spain's banks with this kind of outside support might have been enough. Not now. The country's property and bank bust has been compounded by a massive loss of investor confidence (see article). Capital has drained from Spain at an accelerating pace in recent months, for two reasons. First, investors are worried by the vicious spiral of a weakening economy, tottering banks and worsening government finances. Second, they are losing confidence in the single currency and Spain's place within it. This bank rescue does too little to assuage the first worry, and nothing to deal with the second. That is why it won't work.

Begin with the poisonous links between the banks and the budget. Rather than injecting the funds straight into the banking system, Spain's rescuers are lending them to the government. That could raise its debt by as much as ten percentage points of GDP. Moreover, if the money comes from the European Stability Mechanism, the EU's permanent rescue fund, it will be senior to ordinary government bonds. As a result, Spain's borrowing costs could rise further as investors fret both about the government's solvency and about their place in the creditors' queue.

There is good reason to fear that the second problem—the lack of confidence in the single currency—is going to get still worse. On June 17th Greece goes to the polls again. If it elects a government determined to rip up the conditions of its bail-out, it could be out of the euro soon. That would exacerbate concerns not just about Spain's future, but also about Italy's. The yields on Italian bonds shot up this week because of fears of contagion.

The real source of uncertainty about the euro's future is not what is happening in these countries, but the failure of Germany and its European partners to commit themselves to the level of integration needed to hold the single currency together. This newspaper has long argued that country-by-country rescues will not be enough. Systemic reforms will be needed, including some mutualisation of debts and a move towards a banking union, with euro-wide oversight and responsibility for banks. Spain's bank rescue could have been a down-payment on such a solution. By injecting their funds directly into Spain's banks, European rescuers could have taken a first step towards a banking union. Instead, they chose a mildly improved version of the old approach. It is a plaster, not a cure.