We should recall here the weakness of the euro area’s cross-country risk-sharing mechanisms based on the capital markets and banking system, especially in comparison with other currency areas of a similar size, such as the United States. 7/14  Especially since the emergence of the sovereign debt crisis, in the first part of the current decade, these shortcomings have prompted significant progress in reform of the European institutional architecture, including the strengthening of the mechanisms for surveillance of the fiscal and macroeconomic imbalances and the creation of the European Stability Mechanism, the Single Supervisory Mechanism and the Single Resolution Mechanism. Despite these reforms, significant limitations persist that require further EMU deepening. First, the second pillar of the banking union needs to be completed by means of the creation of a common backstop for the Single Resolution Fund to guarantee its financial sufficiency. Moreover, it is essential to launch a European deposit insurance scheme to ensure the same level of protection for all depositors throughout the euro area, reducing the risk of bank runs in situations of financial stress and to weaken the “doom loop” between sovereign risk and bank risk. In relation to resolution, in line with international initiatives, the European resolution directive stipulates a minimum requirement for own funds and eligible liabilities in the event of resolution. The application of this directive poses a number of challenges, in particular in terms of the transition towards compliance with these new requirements by banks, which I shall refer to later when discussing Spanish banks.

19  Article 26 of the Law on Market Unity provides a specific administrative appeal proceeding for defence of the rights and interests of economic operators by competent authorities. It also provides a procedure for agents to request the National Commission on Markets and Competition to file an appeal for judicial review before the National High Court by means of a streamlined process. Finally, Article 28 allows consumers to inform the Market Unity Secretariat about obstacles and barriers and request a report. 20  Ferraz, Finan and Szerman (2021) and Hebous and Zimmermann (2021). 21  Ilzetzki (2023). 22  García et al. (2022). 6  Against this background, the long-term macroeconomic impact of the Next Generation EU (NGEU) programme will largely depend on how tenders are allocated among different firms. Moreover, this will provide an opportunity to assess the extent to which Spain has improved the level of competition in this area. The fourth factor relates to labour market regulations. The Spanish labour market has traditionally had a high incidence of temporary contracts (a cause of low labour productivity in themselves),23 a wage determination process that takes little account of each firms’ productivity and ineffective passive and active employment policies. Since the pandemic, regulatory changes such as the 2021 labour market reform have been introduced which have reduced the temporary employment ratio. However, a full assessment of these changes will need to consider many different aspects and a broader time frame.