Europe hit an important milestone today as the difference in yield between Italian 10-year bonds and the German bund fell to 250 basis points. In other words, the premium that Italy must pay to borrow money is now just 2.5 percent above the rate paid by the solvent, upstanding Germans, indicating that lenders feel a default from Italy is substantially less likely.
That follows a strong statement yesterday from European Central Bank President Mario Draghi indicating that the credit crisis was ebbing. “We are now back in a normal situation from a financial viewpoint, but we are not at all seeing an early and strong recovery,” Draghi said. As Bloomberg’s Simon Kennedy explains, “policy makers are shifting focus from a financial crisis to an economic growth crisis.”
The “normal situation” is certainly good news. The chart of bond interest rates below, taken from Bloomberg’s Euro Crisis data page. Not long ago that would have been covered in red and yellow.
As for the part about not seeing a recovery, you don’t say. You’ll find all the red that’s disappeared from the bond yield chart in the map of economic contraction below and see just how dire that growth crisis is.
The message coming from the ECB seems to be that the debt crisis has passed and the time for austerity is finally over. It’s not at all evident that this was ever the right approach. As Bloomberg View’s Mark Whitehouse and the Atlantic‘s Derek Thompson point out even the International Monetary Fund, long associated with austerity prescriptions, now thinks it was the wrong one.
The problem with crises is that you can rarely afford to take the time to solve them in sequence — say, debt crisis first, growth crisis next. As you’re working on the first, the second gets worse.
A version of this post also appears in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.