European Leaders Keep Telling Themselves The Same Huge Lie - And It's Ruining The Economy

Europe is a wreck, but for the most part, people these days are talking about crises of democracy and growth, rather than sovereign debt.

Borrowing costs for several nations (ones that have been bailed out and ones that haven't) have come in sharply.

Italy, despite its government turmoil, is seeing yields near its lows of the year.

France, which is a total wreck, and which sometimes gets lumped in with peripheral Europe is borrowing at prices pretty close to the US! (The French 10-year yields is 1.81%, the US's is 1.54%)

Why are yields so low? Well lately people are citing Japan, and the BOJ's efforts to depress rates. But the bigger picture is that ever since last summer, yields have been falling thanks to the ECB's "OMT" announcement, whereby it said that it would backstop government bond markets (provided they agreed to austerity). Essentially, the ECB said it would kind of act like a real central bank, the likes of which backstop the US, the UK, and Japan.

You can see the significance of the ECB's announcement in a chart of Italian borrowing costs. Mario Draghi made his "Whatever it takes" speech (a prelude to the OMT announcement) last July, and borrowing costs have been falling ever since.

Bloomberg

But Europe, despite its success in taming this crisis, refuses to admit what the ECB accomplished.

Instead policymaker keep telling lies about what did it. Instead they keep trumpeting the success of austerity.

From Paul Krugman:

Via Mark Thoma, Francesco Saraceno marvels at the European Commission’s response to the Portuguese political crisis; the Commission praises the government’s determination to impose austerity no matter what the courts say, because austerity is producing “growing investor confidence in Portugal”. Say what? Well, pretty obviously they’re referring to the narrowing of interest rate spreads.

This is very similar to what European leaders said right after Mario Monti got smoked in the February Italian election, that even though the Italian economy was going down the tubes, and though Mario Monti was wildly unpopular, at least he helped restore investor confidence.

EU's Van Rompuy says Italy's reforms restored confidence

— Fabrizio Goria (@FGoria) February 28, 2013

But again, as the chart above shows, what caused Italian borrowing costs to fall was not Monti (who came in in late 2011, and thus saw yields rise through much of 2012), but rather Draghi's government backstop.

Europe keeps telling this lie about austerity and reform working to restore confidence, when actually the economy is getting worse and political crises are becoming more severe. An honest assessment would conclude that the ECB has done all the heavy lifting on reducing borrowing costs, and that a new growth idea is needed.