After the Cyprus Crisis, some experts called for the euro zone to establish a banking union as soon as possible in order to rescue the bank directly, but Professor Markus Kerber, founder of the German think tank Europolis, said, to achieve this strategy, Europe should first clear up the larger problem banks, otherwise it will face hidden dangers.

According to the European Union resolution in June last year, when the single regulatory mechanism is established, the European Stability Mechanism (ESM) will be allowed to directly subsidize the banks on the verge of collapse.

However, according to Prof. Kerber, this resolution contains moral and legal risks which have not yet been fully clarified, and at the practical level, is not entirely feasible.

Kerber said that the supervisory responsibilities borne by the European Central Bank remains a problem, because this may send the wrong signal to the market that even nonviable banks will not collapse.

Kerber said that direct capital injections by the ESM into bank means that it is no longer necessary for the state to provide conditionality, and that is where "the greatest danger lies."

On one hand, the banking sector will become a self-contained system: ESM will fund banks, which then use ESM promises as a guarantee to get more loans from the European Central Bank. Banks will not be ultimately responsible for their actions.

On the other hand, if taxpayers' money continues to flow through the ESM to recapitalize banks, without governmental conditionality, this might lead to a Ponzi scheme, a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors. That is finally "totally undesirable for the taxpayers."

According to the Treaty of the European Union, the states are solely responsible for its own debts, thus the assistance by the ESM to other countries' banks actually lacks legitimacy. Once the taxpayers feel that their interests are jeopardized, there would be huge national resistance, said Kerber.

In addition to the institutional risks, the existing ESM scale is not enough to save the entire European banking sector. According to a study by Kerber, the bank bailout funds may require up to a trillion euros, exceeding the existing capacity of the ESM.

Kerber said, since the euro zone has been determined to move towards a banking union, Euro has to clean some system relevant problem banks to minimize the risks. And the taxpayers of each country should decide how the resolution plan of their own banks could be organized and the state should bear the fund required on its own.

Europolis is a German think-tank which was established in the context of the European debt crisis and aims to explore ways to reshape the European political and economic orders to deal with the crisis. Endi