Europe's banks have been "stress-tested". The European Banking Authority has examined the books of the continent's major financial institutions, and judged that all of them are in just about good enough shape to get through whatever the economy might throw at them next. Phew. That's all right then.
Or maybe not. Eurozone stress tests have a habit of breezily skipping over the really nasty stuff. A few years ago, at the height of the sovereign-debt crisis, they excluded the likely impact of Greece exiting the single currency. This time around they didn't test for lower negative interest rates even though they are the problem right now.
In truth, the eurozone's banks remain under intense pressure, and that is not likely to change any time soon. It's not that they've been lending recklessly, or throwing money at consumers or property developers. In Italy, the country's grinding recession has caused many small businesses to fail, and created a mountain of bad debts a loan that was perfectly possible to service a decade ago is not so good now, in an economy that is still 8% smaller than it was in 2008. In Germany, massive trade surpluses are being recycled to bankrupt economies through the banking system and it is causing inevitable strains.
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It seems unlikely that some form of government rescue can be avoided forever. Italy is the most likely candidate. The government has already put together a rescue vehicle to take bad loans off the balance sheets of its beleaguered banks, and would be doing more if EU rules did not stand in its way.
But don't rule out some nasty surprises in Germany as well. Deutsche Bank's share price has been sliding all through this year, and keeps on going down this week, the shares are trading at under €12, a multi-year low (they are down from €33 in 2014 and €100 a decade ago). Commerzbank down from €12 last year to less than €6 now doesn't look in much better shape. Of course, the markets might have got that wrong. But the price tells you something nasty lurks in Germany's finance system, and it may burst into the open at any time.
The trouble is that any kind of rescue of the financial sector will painfully expose the flaws within the eurozone. It is less than two years since the Greek financial system was essentially allowed to go to the wall. Something very similar happened in Cyprus, another eurozone country that went bust. Again the banking system was allowed to fail.
But would the same thing be allowed to happen in Italy, or even Germany? It seems unlikely. But if Greek and Cypriot banks are allowed to fail, then why not Italian and German ones as well? A rescue of German or Italian banks would make it impossible to avoid the conclusion that there are very different rules for the EU's big core members and the rest on the outside. A genuine single currency area should have the same set of rules for all its members, and they should be enforced. But it is starting to look as if the banks in the core of the EU the original six members, and possibly Spain as well are treated differently. Why should the Greeks, the Cypriots and possibly the Portuguese, the Slovakians, and the Estonians want to be members of a club where they are clearly second-class citizens?
The consequences of a Greek-style collapse in Italy or Germany would be too severe for policymakers to countenance. But if they rescue their banks they will at the same time blow up what little credibility the single currency has left and may finally convince one or two members to leave.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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