When the threat of Greek insolvency first erupted in 2010, the worries rapidly spread to the eurozone’s other peripheral economies, sending borrowing costs skyrocketing. This time around, what’s happened in Greece has stayed in Greece. While yields on Greek bonds hover near 11%, they’re below 2% in Ireland, Spain and Italy—less than what the U.S. Treasury pays to borrow.
This matters for more than just the markets. It is also critical to the eurozone’s most indebted members’ efforts to fix their finances. As European Central Bank President Mario Draghi said last month in unveiling a much-anticipated plan to purchase government bonds: “All monetary-policy measures have some fiscal implications.”
That would be an understatement. By driving rates so low and promising to buy government bonds, the ECB makes it much easier for peripheral economies to stabilize their crushing debts. It obviates the need for added short-term austerity, which could provoke a political backlash that derails the economic reforms essential to bringing down debt in the long run. In other words, monetary policy is central to the success of fiscal policy.