The interest rate on the Spanish 10-year bond fell below its U.S. equivalent for the first time in over six years. Of the four largest EMU economies only Italy has to pay more than Washington to borrow money for a decade.
EMU bond rates have not dropped because the monetary union's economy is recovering. The U.S. economy is expected to grow between 2.0%-2.5% this year. The European Commission is projecting half that, 1.2%, for the monetary union. American unemployment is 6.3%, in the EMU is it 11.7%. By almost any standard the U.S. economy is doing better than its European counterpart and the gap is expected to widen this year as the U.S. speeds up and Europe stagnates.
Interest rates are falling in the EMU because Mr. Draghi and European authorities have convinced the markets and the primary buyers and holders of European sovereign debt that default will not be permitted and the euro will survive.
Since the beginning of the year there has been a steady appreciation of Spanish, Italian and other EMU bonds as investors seek the higher returns available on the continent as a residue of the debt crisis. If Italy and Spain are protected from catastrophe by the central bank, then there is little reason not to enjoy their better returns.
Continental bond purchases are one of the reasons the euro has maintained its strength against the dollar this year despite the diverging rate cycles of the ECB and the Fed. That support is set to diminish as the favorable differential on European debt has been all but eliminated.
Greece 5.72%; Italy 2.70%; US 2.61%; Spain 2.57%; France 1.70%; Germany 1.38%
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