How to Break Europe's Financial 'Doom Loop'

The euro-zone economy is looking a lot healthier. After years of stagnation, growth has finally picked up and unemployment is falling. Fears of a paralyzing bout of deflation have receded as well. Yet there’s a risk of relapse -- and Europe’s banking “doom loop” is the reason.

Close links between government finances and the banking system were a main cause of the collapse of Spain, Ireland and Greece, and policy-makers have done too little to break the connection. In a report published this week, the International Monetary Fund rightly draws attention to the danger: So long as this linkage persists, Europe will continue to pose a threat to financial stability worldwide.