Can the eurozone survive another banking crisis?
The reasons for the nervousness were not hard to work out. The one thing we learned in 2008 is that the financial system is interconnected, and that losses in one market can easily turn up somewhere else. Oil and commodity prices have slumped across the world, and it would be surprising if at least some of those losses were not showing up in the banking system somewhere.
To make matters worse, economies remain depressed, and the ECB [European Central Bank] has imposed negative rates across the continent, making it very hard for banks to earn any sort of margin on the difference between deposits and loans. Against that backdrop, it is easy to understand why traders, who know how these things work better than most people, started to target the banks. Whether any of them are in genuine trouble, we will find out in the next few weeks and months. It may well have been a panic over nothing, then again there may be some genuine pain ahead.
The real question is what would happen then. In the United States, or Britain, if a major bank ran into trouble, the Federal Reserve or the Bank of England would step into rescue it. They have done that before and would do it again. In the first instance, the ECB would attempt to do the same. When Mario Draghi said he would do “whatever it takes” to rescue the euro, it surely included a bailout were one necessary.
But hold on. Stop and think about the politics of that and it all gets a lot more complicated.
At the height of the confrontation between the radical Syriza government and the rest of the eurozone last year the Greek banking system effectively shut down. Capital controls were introduced, and the amount ordinary Greeks could withdraw every day was heavily limited. Much the same thing happened in Cyprus.
But surely it would look very odd if German banks were bailed out, and the ATMs kept open, when Greek ones were not. It would make clear in the most dramatic way possible that the eurozone was about what worked for Germany, and not about what worked for anyone else.
The eurozone is young and still an experiment, there is room for improvement, but is there time?