Two years after the fall of Lehman Brothers, and a massive bank bail-out agreed by European governments, the eurozone’s financial sector is still fragile. As we have seen in recent weeks, the Irish banking sector is insolvent, and there are questions about the capacity of the Irish state to absorb those losses. Jürgen Stark, in charge of the monetary policy section of the European Central Bank, last week raised questions about the solvency of the German banking sector. Wherever you look, two years have passed and nothing has been resolved. There has been lots of activity – bail-outs, bad banks – but no resolution. It was always clear that this wait-and-see approach would eventually backfire. It may be happening already.

After Lehman’s collapse, Europe’s establishment adopted a dual strategy – if you want to call it that. In the short term, it threw money at the problem, through loan guarantees and generous liquidity provisions, culminating in a huge bail-out facility for sovereign states. The long-term strategy was a prayer for a strong V-shaped recovery.

As long as you make sufficiently optimistic assumptions about future income growth, you can pay off any amount of debt. If you assume a post-reform Greece will miraculously turn into a Aegean tiger, or that Ireland will generate another housing price bubble, the present rate of indebtedness will be no big deal. It all rests on your assumptions about growth. In the summer, it looked as though the strategy might work, as the economic data came in better than expected. That was then.