Afternoon Must-Read: Paul Krugman on How Much Better Things Are in Europe Now that the European Central Bank Is on the job

Paul Krugman: How Much Better Things Are in Europe Now that the European Central Bank Is on the job: “Government debt to GDP… the 10-year interest rate… [at] the peak of the euro crisis in 2011 and a relatively recent observation…. Borrowing costs for the troubled euro countries have dropped a lot… 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….

Why?… The timing strongly suggests 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… [and perhaps] some reduction in the political risk premium, because European nations are proving amazingly determined to stay on the euro at almost any cost. So is the euro crisis over? No–it’s not over until the debt dynamics sing… a duet with internal devaluation. We have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off…”