Antifragility

The fall in borrowing costs since last summer has brought relief to European sovereign debt markets. The 5.34% yield on Spanish ten-year sovereign debt is lower than at any point since March; the 4.50% yield on Italian ten-year debt is the lowest in more than a year. Moreover, the benefit is not limited to countries in the euro-area. The Hungarian government can now borrow at less than 7%, compared to more than 8% last July; Polish ten-year bond yields are now just over 4.2% from just under 5.2%; and the Czech government borrows at just under 2.0%, compared to a mid-July peak of close to 3.5%.

The relaxation of tensions is a good sign, particularly against a backdrop of weakening economic growth forecasts both in the euro-area and worldwide. Last week, the OECD joined the chorus of international economic organisations in publishing a sharp downward revision of its estimates for future economic performance. However, the tensions in European sovereign debt markets were always only a symptom, not the problem itself. The authors of the OECD Economic Outlook are clear in asserting that "the euro-area crisis remains a serious threat to the world economy, despite recent measures" and go on to allude to a comprehensive reform agenda. The two questions to consider are whether Europe's politicians have the political will to push a painful and ambitious agenda, and whether the reforms they endorse are what is required.