If the eurozone is to save itself, it will have to face the real crisis: its banking sector. Far too much time has been spent on fiscal policy when the existential threat to the eurozone is the ongoing collapse of bank lending in the weak economies, as Gavyn Davies recognises. Yes, fiscal policy counts, but the debate commonly framed between “austerity” (more deficit reduction) and “growth” (more deficit spending) is a serious distraction to the survival of the currency union.

The 2008 financial crisis in Europe and the US arose from excessive bank lending during the 2000s caused by deregulation and excess liquidity from the Federal Reserve and the European Central Bank. The excess liquidity found its way to a variety of sub-prime borrowers. There was a housing bubble in the US, UK, Ireland and Spain; a corporate-acquisitions bubble in Iceland; and a public sector spending binge in Greece.

When the easy credit stopped in 2008, the banking sector was over-leveraged and under-capitalised. Bank assets – including mortgage-backed securities, corporate acquisitions, and government bonds – were heavily impaired, so that bank capital plummeted. A financial panic ensued after the Lehman collapse, with banks ceasing to lend to one another or to blue-chip companies. Liquidity dried up. The US and Europe plunged into a very steep downturn.