The State of the Euro, In One Graph

Krugman shows The State of the Euro, In One Graph

"What you see here is that 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.

Why has this happened? 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."