



But this doesn't really make sense. It explains why Europe's financial sector fell much more in 2008 than Australia's financial sector did, but it doesn't explain why Europe's has kept falling and Australia's hasn't. The answer, as always, is that it's about the economy. Commodity exports -- thanks, China! -- have powered Australia, while the eurozone has self-immolated in a crisis of the common currency. What does that have to do with banks? Well, financial contracts assume that incomes will steadily go up. When incomes -- and the economy -- do not grow as expected, debts that should not have gone bad go bad.





Something incredibly bad and incredibly rare has happened to Europe's periphery since 2008. The total size of their economies have fallen. So-called nominal GDP, which is just inflation plus real growth, usually increases 5 percent a year -- and that's what banks count on when they make loans. If the economy grows less than that, otherwise creditworthy borrowers will have a harder and harder time paying back their debts. Including governments.





The chart below looks at nominal GDP "growth" (or lack thereof) in Australia and Europe's periphery since 2008. As Evan Soltas said, Europe's problems are nominal.