The idea that austerity was needed to restore the trust of the market is one you hear often, particularly from Olli Rehn and Schauble. But it lacks evidence. The relative stabilization of interest rates came after Draghi’s ‘do whatever it takes’ speech; it had little to do with austerity programs. The market only cares about whether debts are likely to be re-paid: if austerity worsens debt-to-GDP ratios it does nothing to improve market confidence. And this is to say nothing of the drastic social and political consequences of austerity (50% youth unemployment in Spain, the rise of a Nazi movement in Greece, etc.)
You are absolutely right, however, to key on the crucial role of central banks. Japan is the perfect example: at 220% of GDP, its debt load dwarfs that of any European country. Yet it pays extremely low interest rates; very simply, its stupid for speculators to attack countries borrowing in their own currency, because they will never be able to default. If the ECB offered the unambiguous backing to Eurozone governments that nat’l central banks implicitly offer their own governments, the interest-rate aspect of the crisis would dissapear overnight.
