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Where's all that bank contagion gone?

How far we have travelled.

New Statesman
Photograph: Getty Images

It is a very telling measure of how far we have travelled down the path to probable Eurozone survival that contagion, and 'bank' contagion specifically, has become much less of a problem. Despite last month’s chaotic, and briefly almost disastrous, Cypriot bank bail-in, and the horribly inconclusive Italian elections in February, there have been virtually no negative consequences for the fortunes of the wider European financial community. A year or so ago either of these events could have been reasonably expected to have raised real fears that queues would form outside banks all over Europe.
An illustration of this is that the Euro Stoxx Banks index is now trading at around 100, the same level as last October, and way above last year’s low of 73.06, seen in July.

The most important reason for this new-found sanguinity is the European Central Bank’s, (ECB), Damascene conversion under Draghi from Trichet’s Bundesbank poodle to a central bank which is focused on the needs of all seventeen states in the union, the completion of which was epitomised by Draghi’s Clint Eastwood moment last September when he warned the markets that, 'we'll do whatever it takes, and it will be enough' and announced Outright Monetary Transactions. This virtually guaranteed that Eurozone nations would always have access to liquidity, hence breaking the potentially lethal ‘dance of death’ of over-indebted states and their under-capitalised banks, who are in turn laden down with massive investments in their national governments’ bonds.

Of almost equal significance has been Chancellor Merkel's extraordinarily dexterous performance in persuading her people of the manifold benefits of the Euro, (i.e. it's a highly effective export finance scheme for Germany-who are the ultimate, unchallenged Currency War victors), and therefore that bailing-out profligate southern neighbours is absolutely in Germany's interest. I’m happy to predict that this will continue, and indeed go into hyper-drive after she has won September's elections, (hardly in question in the absence of any credible Euro-sceptic opposition), as she will then feel free of the political imperatives that have thus far prevented her from allowing Germany to acquiesce to the issuance of jointly and severally liable Eurobonds, (with all Eurozone nations, including Germany, equally on the hook), and a proper banking union.

These measures will ultimately save the Euro, for another 5 years, say.