So far the economic effects of Britain's Brexit vote have
been pretty localised. The pound and business confidence have
plummeted and economists have slashed their forecasts for UK growth
next year. But there are few signs of contagion from the UK
to the rest of the world. The indicators of financial stress which
were flashing red in 2008-09 following Lehman's failure, or in
2010-11 at the time of the euro crisis, are at low levels. Brexit
is a huge political shock, but it is not a global economic
shock.
Around Europe the strongest signs of financial stress come not
from the UK but from the Italian banks.
Italy offers a case study in what can go wrong in a banking
system. The financial crisis and its aftermath left Italian banks
nursing 360 billion euros of non-performing loans – debts on
which creditors have not made payments in more than 90 days.
Italy's levels of non-performing loans are three times the EU
average. If, as is usually the case, most of these
