The difference between comedy and tragedy is that when someone else slips on a banana it is comedy but when you do it yourself, it is a tragedy.Today the farce that was the Eurozone countries turned into a tragedy….

The European Banking Authority announced that it is proposing that eurozone banks should hold capital equivalent to between 9% and 10% of their risk-weighted assets, on a Basel 2.5 basis, with sovereign debt in trading books and banking books marked down to market prices. eurozone banks, as a group, will probably be forced to raise around 200bn euros of additional capital, if European Union governments accept the EBA’s recommendations. Morgan Stanley estimates that if banks are given time and discretion about how they can meet the new capital requirements, their balance sheets could shrink by 2 trillion euros.

Whichever way the requirement is met (by growing capital or shrinking assets) this is likely to throw the German and French economies into deep recession.

The tragedy of Europe is that at a strategic level it opted for monetary union without political union so in the end when the crunch came it could not make decisions fast enough. It need not have been a disaster if 12 months ago Angela Merkel’s government had chosen to avoid the temptation of stereotyping the Greeks as lazy, tax avoiding, good for nothings. The sterotype may or may not be true, but by painting that picture the German government made it impossible to politically sell the rescue of the Greek economy to the German tax payer in timely manner.

The truth is that outside of the PIIG countries the banks most exposed to PIIGS government and bank debt are German and French. The bailouts were to stop recession in Germany and France, not Greece and Portugal who were being put through the mill by the terms of the bailout.

The reduction in credit to the German and French economy looks very likely to pull the wider European economy back into recession. It is likely that Europe will not pull out of recession until the power house of Germany has recovered.

Of course the farce will continue for a little while longer… but mark my words, the moment for avoiding recession has passed. Europe’s leaders have been dining in the last chance saloon for too long. All that remains are a few more bitter words about the size of the bill and an argument about how much each will pay… but pay they must.