Inadequate stress test inspires anti-EU sentiment across Europe

Yesterday’s European Banking Authority (EBA) stress test was supposed to restore confidence in the euro and Europe’s beleaguered financial institutions; it has had the opposite effect. Investors and market analysts are preparing for ‘Black Monday’ after only 8 banks failed the test and must now raise £2.2 billion between them to stave off ruin. A respected estimate by Goldman Sachs expected at least 15 banks to fail, requiring £29 billion to recapitalise.

As the Spectator’s business blog reported yesterday, analysts feared that the EBA’s test would not be sufficiently stringent, and so it came to pass. The findings have served only to undermine confidence in institutions across the continent, many of which are perfectly healthy. Those British analysts who have gone on the record sound a clear note of fury. “If the European Union could monetise the value of the credibility it has destroyed it would be richest organisation on earth,” one fund manager told the Telegraph.

Those sentiments echo across the continent, where there is horror that the EBA (the EU’s banking regulator) could have played dice with the financial industry just to insulate the EU’s palpably inadequate response to the eurozone crisis. Even media organisations with no Euroscpetic axe to grind ooze contempt. Bloomberg, for instance, quotes a spokesman from DSGV (the German Savings Banks Association) railing against “high-handed measures being set to achieve political goals.”

At the same time, the EBA’s stress test conveniently ignored the issue of defaults on sovereign debt, which has spooked investors and undermined the credibility of the test. That uncertainty has, among things, affected the insurance market: the cost of insuring European creditors against sovereign default increased yesterday when it was supposed to fall. In other words, the incoherent stress test has made European financial institutions less competitive. National regulators will now have to strive to restore confidence in individual institutions.