It’s possible alternatively that there was a multiple equilibrium here, with the “good” or low interest equilibrium (with a self-fulfilling degree of confidence in the creditworthiness of all the sovereigns) being selected by the market at the start of the euro, and events during the financial crisis – not least those associated with Greece – having tripped the system into the “bad” or high interest equilibrium with default risk premia moving a number of sovereigns into a more challenging debt sustainability position.
Non-performance rates in Europe are now around 8 per cent of loans, higher than the US and UK at their peaks, and still rising. The figures also illustrate the good performance of Australian banks during this period. There are a number of reasons for the contrasting performances of the US and European banking systems.