A different perspective from Michael Darda of MKM Partners:
It’s the NGDP, not the debt. A market monetarist perspective on the eurozone debt crisis would focus on the fact that the ECB has been negligent in providing a backdrop of reasonable NGDP growth.
The subsequent debt and interest rate surge is an effect of a collapse in actual and prospective NGDP growth rates, not the cause of it. It is up to the fiscal authorities to lay the foundation for real growth over the long run. But central banks control the nominal side, and NGDP and RGDP are highly correlated in the short run.
For countries like Spain and Italy, where NGDP is contracting and bond yields are surging, a self-sustaining debt spiral continues. While the ECB’s LTROs and rate cuts have helped financial conditions modestly (euro swap spreads have not run back to last year’s highs despite the surge in Spanish and Italian debt yields and spreads), these actions have not been sufficient to restore adequate NGDP expectations for the eurozone as a whole or the periphery in particular.
The ECB could do a lot to help the situation, but the more slowly it goes, the more it will have to do to right the ship. … At the moment, inflation-indexed swap and bond spreads suggest the ECB will undershoot 2% inflation in the near term, placing more deflationary pressure on the periphery. Moreover, we believe the ECB could justify a large-scale QE because it has missed its 4.5% per annum broad money “reference rate” for 37 consecutive months. Since velocity tends to fluctuate, it would be best for the ECB to simply institute a level target for either NGDP or the GDP price deflator and use its balance sheet and market expectations to hit the target.