In my reading this weekend, I found some very interesting articles on deposit flight in the EU. The below chart looks at Target 2 imbalances within the EU. I'm not going to go into detail about what these are, but generally, they represent the movement of capital from peripherial countries to the core, namely Germany.
The Mastricht Treaty allows for the free flow of goods, labor, and capital through the EU. The cheapest form of insurance an EU citizen outside of Germany can buy to protect themselves is to move their money out of the weak countries into the strong countries. This helps them avoid risks that their bank becomes insolvent and that their deposits get redenominated into new currencies other than the euro.
This material is from the FT. To read more, go to http://blogs.ft.com/gavyndavies/2012/05/20/the-anatomy-of-the-eurozone-bank-run/#axzz1vVX27kRH
Also, Wolfgang Manchau has a great post about these issues as well. http://www.ft.com/intl/cms/s/0/5d7ff324-a0e6-11e1-9fbd-00144feabdc0.html#axzz1vVWqEfZm. Proposed solutions to these problems include:
A) A eurowide deposit insurance scheme which separates the bank risk from the national risk. Spanish banks are suffering due to the preceived risk of the Spanish Government Guarnantee. If you were to mutualize the risk, meaning that all the EU guarantees the deposits rather than just the national governments, this could slow the deposit flight.
B) The ideal situaiton would be to inject equity into all the "Too Big to Fail" European banks. I think following the US playbook on this would make sense. Force all the banks to take equity in the form of a Mandatory Preferred issued to the EFSF or ESM or both. Give the banks some breathing room to earn back some capital and pay back the preferreds over time when/if the system is more stable.
The key issue here is that the banking system is broken, like late 2008 in the US. If the plumbing isn't working, the whole system risks coming to a stop. European leaders must address this issue now or risk a severe financial accident.