Investors seem to be taking a champagne bath in the stock market at the moment, but it is worth remembering at such times that the problems of the eurozone, particularly the Club Med countries, have not gone away. In fact, between the weakness of Portugal's banks, Italy's falling industrial output and France's desperate attempts not to be bracketed with them, the risks are largely unchanged. The difference now is that they are perhaps better understood, but that doesn't make them any less frightening, particularly if loan impairments in Club Med's banks start to pick up.
The latest worries are over the state of Portugal's banks in the aftermath of a Cyprus bailout that imposed unprecedented costs on depositors. So far, the largest Portuguese banks have benefited from liquidity provided by the European Central Bank, the problem is the stability of loan books at a time when unemployment is rocketing and GDP shrinking at an unprecedented rate. This would increase loan impairments at a time when access to fresh sources of capital would be difficult, which is why Portugal's banks are nervous. There is also anecdotal evidence that depositors have been moving cash from accounts to safety deposit boxes - the monetary equivalent of stuffing the mattress.
The situation in Italy, where a former comedian briefly held the balance of power after elections earlier this year, defies rational description, but at least the troubled country at last has a functioning government. Italy's problems stem from a savage contraction in consumption. The economy has contracted sharply since the summer of 2011 and industrial production is now more than 20 per cent below the heights reached in 2007. Italy is counting on export-led growth to exit the slump and the most recent figures showed a rise in industrial orders in March - the first for five months - though this is still down 10 per cent year-on-year. The deflationary environment, alongside the labour reforms brought in by Mario Monti's technocratic government in 2011, has had the same cumulative effect as a devaluation, which is probably why the Milan MIB index is close to a two-year high.
