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Austrian Economics, The Real Kind
It’s not just Spain and Italy — as many people have been noticing, spreads of French 10-years against German bunds have also widened significantly. And France is responding with fiscal austerity. But is this really about fiscal issues, or at any rate the kind that austerity could possibly address? Consider, if you will, Austria.
Austria is, by most comparisons, a very successful economy, with low unemployment and a current account surplus. Its fiscal outlook is slightly better than Germany’s, according to IMF projections:
Yet Austria has had almost exactly the same interest rate experience as France. In June, both Austria and France had 10-year rates of 3.43%, 44 basis points above Germany’s 2.89. As of today, German rates were down to 1.91, but French rates were up to 3.47 — and Austrian rates up to 3.44. Both countries, in other words, have seen their spreads more than triple.
What exactly is going on here? Is the market worried about bank exposure? Is it pricing in a possible euro breakup? Lots to chew on here. But one thing is clear: fiscal rectitude — which the Austrians have displayed even more than the Germans — is no protection.
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