If a picture paints a thousand words, figure 3.2 paints a million. On the left-hand side, we see what the markets used to think of sovereign bonds before the euro was introduced. Greek ten-year bond yields started out at 25 percent, fell to 11 percent, and then came within fifty basis points (half a percent) of German bonds by 2001. Similarly, Italian bonds fell from a high of 13 percent in 1994 to becoming “almost German” in 2001 in terms of yields. Yet it is manifestly obvious that neither Greece nor Italy, nor Ireland, nor anyone else, actually became Germany, so why then did we see this convergence in yields? The popular answer is that the introduction of the ECB and its unending quest for anti-inflationary credibility signaled to bond buyers that both foreign exchange risk and inflation risk were now things of the past. The euro was basically an expanded deutsche mark, and everyone was now German.

Mark Blyth, Austerity, loc. 220