The State of the Euro, In One Graph
- borrowing costs for the troubled euro countries have dropped a lot. But it’s not because austerity policies have brought their debt under control — debt ratios are still rising, in large part because of shrinking economies and deflation. Instead, there has been a dramatic flattening of the relationship between debt and interest rates
- The timing strongly suggests that it’s mainly the Draghi effect — that the ECB’s signal that it will, in a pinch, act as sovereign lender of last resort has removed much of the fear of self-fulfilling liquidity panics. It’s possible that there has also been some reduction in the political risk premium, because European nations are proving amazingly determined to stay on the euro at almost any cost.
- as a europessimist, I do have to admit that it’s now possible to see how this could work. The cost — economic, human, and political — will be huge. And the whole thing could still break down. But the ECB’s willingness to step up and do its job has given Europe some breathing room.
- The basic fact of UK economic performance since the financial crisis is that it has been terrible — in fact, as the NIESR documents, GDP performance has been substantially worse than during the Great Depression:
- The only reason Britain isn’t suffering terrifyingly high unemployment is the fact that, for reasons not clear, productivity has collapsed, so that the shrunken economy is still employing a lot of people.
- Cameron/Osborne imposed a lot of austerity in their first two years, then let up substantially. In effect, they spent a while banging Britain’s head against the wall, and are now claiming vindication, because it feels good when they stop.
