Krugman is at it again, arguing that the (now visible) bond vigilantes who are attacking Europe aren’t doing so because of excessive government borrowing. Rather than this being about too much debt, it’s about governments not being able to borrow in their own currency. So I have two questions:
(1) For people who think this is basically right, how do you explain the progression of the crisis in Europe? It didn’t start with Germany or France, and then bounce around. No, it started with the country everyone–even Krugman–acknowledges was fiscally irresponsible, Greece, and then it started spreading to the other governments that were also in objective (fiscal) trouble. It was only fairly recently that the crisis spread to governments that have relatively low debt-to-GDP ratios. So why should the crisis have developed in this fashion, if this is a story about currency areas and not government profligacy?
(2) Can anyone dig up data on corporate bonds in the countries in question, so that we can look at (say) what happened to the spread between government and major corporate yields in various European countries? It would also be good to look at the spread between corporate yields across countries. (Part of where I’m coming from is that the German government might be in trouble now, because it is on the hook for the ECB’s foolish commitments to bailing out the PIIGS. In contrast, major corporations in Germany wouldn’t be affected nearly as much, so their yields shouldn’t have spiked as much as German sovereign debt did recently. But if it’s just a matter of currency, then obviously every entity in Germany that issues debt should have been affected the same. Or another way: Krugman likes to show that euro governments see their interest rates going up, while non-euro governments have rates that are falling. OK, does the same thing hold for the corporations in those countries?)