Amongst the very first to be hit last year (with the collapse of IKB in Germany, and the run on Northern Rock, which subsequently had to be nationalized), European banks had lately appeared to fare better as Bear Stearns collapsed, Fannie Mae & Freddie Mac were bailed out, Lehman Brothers went bankrupt, AIG was rescued, Merrill Lynch was swallowed and Washington Mutual failing and being taken over. As the US is discussing its $700 billion bailout of Goldman Sachs and friends, we've seen Fortis needing its own governmental rescue, Bradford & Bingley being nationalised, Hypo Real saved by other German banks, and worries about a number of other entities come to the fore.

Before going into why European banks should be so vulnerable, it's worth pondering Wolfgang Munchau's point:

While the Americans need a better rescue plan, the Europeans need a lot more: a system that could produce a rescue plan in the first place.

Or maybe ... we should focus on having a system that does not require bailout plans in the first place? 

European Schadenfreude about the collapse of American investment banks, and about the general crisis of the financial capitalism model has been met by smirks by the Anglo-Saxons that European banks have been hurt just as badly as UK and US ones, despite their home countries self-professed hostility to these shenanigans, so it's worth making the following points:

• While the crisis in financial markets is widespread, and hurting all banks and all corners of the market, the fact remains that the banks that have gone down were the weakest ones, and/or those that made the most stupid decisions in the recent past. Either they had a business model predicated on hidden assumptions that were unreasonable with hindsight (like the perpetual liquidity of short term commercial paper, like Northern Rock), or they made bad bets (on CDSs, like AIG, on real estate, like Lehman or WaMu, or on banking, like Fortis buying ABN-Amro at the top of the market). Those that are holding up better today are those that visibly had better risk management and less greedily invested in the most dubious schemes on the market in recent years;
• the main reason European banks are also touched today is that finance is global, and the push for deregulation has not been any weaker in Europe than in the US - indeed, it could be argued that the EU was a convenient Trojan horse for the City to force other European markets to open up to the (mostly American) financial behemoths based in London and to push local banks to react by adopting, as much as they could, the same posture of short term profit seeking (only with less experience, and less access to international clients); in effect, Europe has imported the Anglo Disease;
• nevertheless, despite these trends, and the silly behavior of local banks trying to turn themselves into wannabe Masters of the Universe, the economies of European countriers outside the UK and the US is still much less dominated by financial firms, and they will ultimately suffer less from the contraction of that sector;
• in the short term, the priority must be to maintain access to funding for the real economy, so that the freezing of the interbank market does not cause companies in other sectors to be starved of funds, go bankrupt or simply delay investments. That has been done on a short term, but ongoing, basis by the European Central Bank, which has displayed a commendable pragmatism in that respect; stabilising the system in the long run will require more upheaval and cleaning up of the banking sector, but the consolidation and nationalisation is now under way (done by each government on an ad hoc basis) and there is no reason to think it can't be brought to a satisfactory close, except possibly in the UK;
• ultimately, the main reason for optimism for eurozone banks is that the problems for them lay in the past - their exposure to overleveraged toxic assets from the US; the second round effects that are going to take place in the US as the housing market drags down the real economy and further hits the financial sector will not touch them to the same extent; eurozone economies are not as vulnerable and even those that are most at risk (like Spain) are in a much more comfortable situation in that their government budgets and their banks are still in excellent shape.