MADRID (Reuters) - The Bank of Spain called on euro zone countries on Tuesday to complete the banking union by setting up a deposit insurance scheme and to create a stabilization fund, while warning of risks to bloc’s economy such as Brexit uncertainty.

The central bank said Europe faced significant downside risks from Britain’s plans to leave the EU, high national debts, aging populations and low productivity.

The European Deposit Insurance Scheme (EDIS) is the missing part of the plan for a full euro zone banking union which aims to make the financial sector more resilient to shocks and less likely to need taxpayer bailouts.

“It is necessary to complete (the) revision of the Economic and Monetary Union to avoid the single currency still being exposed to tensions in case of high-calibre disturbances,” Bank of Spain Governor Pablo Hernandez de Cos said on Tuesday as part of a presentation of the central bank’s annual report.

Germany, the Netherlands and other northern countries fear agreeing to EDIS now would mean they could be burdened with repaying deposits in countries like Italy, Greece or Portugal, where banks are vulnerable, often as a legacy of the sovereign debt crisis of 2010-2015.

The banking union must be completed before the euro zone faces another recession or financial crisis, a source at the Bank of Spain said.

“It is essential to develop this macro-strategy for the protection of capital markets in order to offer all citizens and non-financial companies a mix of financing between bank loans and markets,” the source said.

IN THE HEART OF EUROPE

The bank’s annual report comes as Socialist premier Pedro Sanchez, buoyed by two electoral victories in a month, seeks to thrust Spain back into the heart of European Union decision-making after years of domestic woes reduced Madrid’s influence.

Sanchez’s plans include pushing for a common budget for euro zone members, an EU-wide unemployment fund and climate measures. He also favors setting up a European Investment Stabilisation Fund to prevent future economic crises.

“The capacity for mutual assurance would be strengthened if the creation of a cyclical stabilization instrument was approved, a proposal that has not yet reached a sufficient degree of consensus (within the EU),” De Cos said.

The Bank of Spain also said it a risk-free EU asset was needed as part of a closer European integration.

“It will not be easy to get the political consensus to move in that direction, but a window of opportunity opens up with a new European political term and we believe that it is absolutely necessary,” a Bank of Spain source said.

A European Commission plan to create European safe assets backed by euro zone sovereign bonds has been blocked by Germany over fears it would increase German funding costs.

On the economy, the central bank warned that the Spanish labor sector remains highly dysfunctional, with unemployment rates only expected to fall to around 12% by 2021. It said increased productivity was the only mechanism for sustainable growth.

Spain’s economy suffered a near five-year slump from 2008 to 2013, when unemployment soared to almost 27%, but has since rebounded and was 14.7% in the first quarter.

“While it’s true that the unemployment rate has fallen significantly since the economic recovery began, it is still very high,” De Cos said.