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NEW YORK (TheStreet) -- Spain is pouring 19 billion euros into troubled real estate lender Bankia, SA. Even with the 20 billion euros in aid already dispensed to financial institutions, this may not avert a run on Spanish banks and economic collapse. Much larger than Greece, Spain could prove beyond Germany and other northern countries' capacity to rescue, and its collapse would spell the end for the euro.

Spain's economic crisis did not result from government overspending. Prior to the Great Recession, Madrid's budget was consistently in surplus, and Spain's debt-to-GDP ratio is only 70% -- lower than Germany or France.

During the boom years, wealthy northern Europeans rushed to purchase second homes and vacations in Spain's sunny climate, instigating a rush of foreign funds into its banks to finance dwellings and hotels. After the 2008 global crisis, land values fell, and banks were stuck with nonperforming real estate loans.

Faced with similar challenges, the U.S. had tools that neither Spain nor the European Union possess.


Federal Reserve

pumped some $2 trillion into U.S. banks and financial institutions -- including purchases of many nonperforming and high-risk loans. The European Central Bank has extended long-term credit to banks against mortgages and business loans deemed secure, but it cannot bail out banks with too many nonperforming loans.

The ECB can lend money to national central banks, which extend credit to commercial banks against their loans, but if those loans fail, national central banks assume liability. Unlike the Fed and ECB, those can't print money, and their central governments must either tax citizens or borrow euro on international capital markets to make up losses.

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Madrid's current bank bailout has undertaken an exercise similar to the U.S. Treasury's TARP -- selling bonds to finance bank bailouts; however, the ECB does not stand ready, as the Federal Reserve did for the Treasury, to print money to buy any bonds Madrid can't sell.

The ECB should remain reluctant to acquire powers similar to the Federal Reserve, because it lacks authority the U.S. central bank shares with the Comptroller of the Currency to regulate banks. The European Banking Authority has very limited powers, and bank supervision remains in the hands of national governments, subject to whims of national politicians and elections.

Investors, recognizing that guaranteeing Spanish banks is an enormous burden for Madrid to shoulder without a central bank that can print euros, have driven up Madrid's borrowing rates. This has forced draconian spending cuts and deepened the Spanish recession.

A terrible negative-feedback cycle has been unleashed -- a contracting economy lessens Madrid's tax revenues, this further engenders investor doubt and even higher interest rates, higher borrowing costs require more spending cuts and those further worsen economic contraction.

Depositors, fearing bank failures or a Spanish pullout from the euro and conversion of their accounts into less valuable peseta, could force Madrid to alter strategy by withdrawing funds.

Deposit Insurance

To discourage bank runs, the eurozone has no analog to the Federal Deposit Insurance Corporation, which is backed up by the U.S. Treasury's capacity to tax and sell bonds, and ultimately the Federal Reserve's ability to print money. Instead, national agencies back up deposits, and Madrid's ability to stand behind Spanish banks with 663 billion euros in real estate loans is highly uncertain.

Throughout the European sovereign debt crisis, much has been made of Brussels' lack of taxing, spending and borrowing powers. However, monetary union also requires that the ECB, like the Federal Reserve, be charged with guaranteeing the solvency and regulating banks, and that a continental deposit insurance system -- backed by taxing authority in Brussels and the ECB's capacity to print money -- be established.

Those won't come in time to save Spain. It may simply have to dump the euro, so that it can print its own money and solve its problems much as the U.S. did in the wake of the financial crisis.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.