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The looming failure of the third-largest bank in Italy Monte dei Paschi di Siena finally attracted the attention of European leaders to the long worsening banking crisis in the country. This may be a blessing in disguise, offering the best opportunity to achieve a lasting solution and even to strengthen the European Union.

The financial problems of Italy are forming recent years. The weak lending standards and double recession led to bad loans to over 350 billion EUR, making many institutions zombies, unable to provide fresh loans needed to support economic growth. The successive governments have avoided making a proper assessment, partly because of EU rules for rescuing the banks, which require them to impose losses on creditors, including investors who benefited from buying bank bonds without realizing the risks.

The most recent events might have led Italy to a turning point. The inability of Monte dei Paschi to attract private capital showed that some banks can not solve their problems alone. European Central Bank, responsible for the supervision of the larger institutions in the Eurozone, is increasingly applying pressure for action. And after the referendum on December 4 already passed and not a distraction, Italy’s new government may be able to gather political willingness.

What should happen? The banks in the country require more new capital than themselves can attract and more than European rules usually allow the state to provide. The lenders must bear some of the burden anyway will really decide that taxpayers will always rescue them. But even after they pay reasonable in this respect, the lack of capital remains. Therefore, Europe should allow Italy to apply the exception in banking regulations, allowing the government to nationalize Monte dei Paschi di Siena and several other banks, and for a long enough time to restructure and reform the government. At the same time, the government of Italy should require creditors to take losses while at the same time creates a fund to compensate retail investors, lured to buy risky bank debt. Finally, Italy has to undergo hundreds of other banks to a detailed assessment by the ECB to determine which should be saved and which to be closed.

These measures will help the economy, which needs all possible assistance. They can pave the way to completion and the banking union the Eurozone, which goal is to prevent troubled banks to undermine public finances and vice versa. The proof that the ECB and Italy can act effectively, may lead other members of the Eurozone (especially Germany) to be more prone to sharing risk through initiatives, such as mutual guarantee deposits. Without such mechanisms common currency might not survive in the long term.

It is clear that the request is not small, and the Italian and European representatives have not yet distinguished themselves on these issues. This is a good time to be more decisive. It would be a shame this crisis to go to the wind.

