The evolution of ECB monetary policy from the 2000s to now, and the effect that has played on bond yields over this time period.

Ciaran McKenna is a research associate for Resilient Economics Think Tank in Scotland, as well as being a co-founder and board member of Modern Money Lab Europe

The first part of this two-part series was a direct rebuttal to US economist Paul Krugman’s ridiculous hysteria regarding France’s debt sustainability, which he shared on his Substack. However, the hysteria he subscribes to is repeated across mainstream economics and the media. Moreover, it does not apply only to France, but also to other Eurozone countries supposedly facing future debt defaults unless they rein in their fiscal spending. Therefore, the second part of this series delves deeper into the evolution of the Eurozone project and why the debt crises of the 2010s should be a concern of the past.

Given the power of the ECB to act as the buyer of last resort, they are arguably the most powerful institution in the Eurozone. Part one emphasised that despite being legally prohibited from directly financing member governments, by merely announcing they are prepared to act in the secondary market to provide liquidity, they have the ability to calm and stabilize markets.

However, this was not always the case.

The Eurozone Project:

The Eurozone, established in 1999 following the Maastricht Treaty, represents a unique experiment in monetary integration without full fiscal union. By replacing national currencies with a shared one, member states surrendered monetary sovereignty while retaining responsibility for their own fiscal policy, but this was also subject to strict deficit and debt rules.

A key feature of early Eurozone policy was the no-bailout clause. Essentially, EU institutions and national governments could not bail out other member states experiencing financial distress. This also included prohibiting the ECB from buying government bonds directly from member states, a practice known as monetary financing.

This key feature reflected the underlying ideology of the ECB. The thinking was that if national governments spent too much, leading to increased bond issuance, private markets would demand higher interest rates on their bonds. This would, in theory, act as a natural punishment for countries running high deficits. However, during the first decade of the Eurozone, this did not transpire. Despite varying degrees of fiscal and trade deficits across Eurozone members, bond yields across the Eurozone remained closely aligned.

Graph 1: 10-Year Government Bond Yields. Selected Eurozone Countries. 2000-2008.

However, following the Great Financial Crisis (GFC) in 2008, this honeymoon period abruptly came to an end. In the lead-up to the GFC, southern European countries, especially Spain and Greece, had accumulated substantial private debt, which was at the heart of their property booms. As liquidity began to dry up and investors rushed to sell, bond yields in these indebted economies began to diverge sharply from those in stronger European economies (see Graph 2), as bond markets began to doubt the solvency of countries like Spain and Greece.

Graph 2: 10-Year Government Bond Yields. Selected Eurozone Countries. 2009-2015.

Greece is the obvious outlier above, however we can see Spanish and Italian yields rise to around 6-7% which is still a significant divergence from the other countries in the graph whose yields are around 3%. In Graph 1, we can see that all the yields were sitting in the range of 4-5% before the GFC.

At this moment, since there was no liquidity backstop, or in other words, no buyer of last resort, Greece was quite literally running out of money. No private market investors were willing to buy Greek bonds.

Then finally, in September 2012, the ECB announced that it would provide unlimited support in the bond markets. This announcement came in the form of their Outright Monetary Transactions (OMT) programme. Referring to graph 2 again, we can see the yields in Greece bonds decline rapidly, as well as declines in Spanish and Italian yields. As a result of the ECB announcing that they were willing to make unlimited purchases of government bonds to provide liquidity and stabilise the crisis, private market participants who had previously sold Greek / Spanish / Italian bonds, flooded back into the market to buy them at low prices, and this is what drove the yields down.

Again, as emphasised in part one, the ECB only announced that they were willing to act as a buyer of last resort. They did not have to buy one single Euro government bond under their OMT programme.

In Graph 3 we see all 10-year government bonds of the selected Eurozone countries (including Greece) converge to under 2.5% – which is lower than they were before the GFC.

Graph 3: 10-Year Government Bond Yields. Selected Eurozone Countries. 2015-2020.

Neoclassical Fundamentals Defied:

Paul Krugman, along with his fellow mainstream economists, subscribes to standard neoclassical arguments that claim private market participants price government bonds based on some aggregation of economic fundamentals, such as a country’s growing national debt or budget deficit. However, this argument was severely challenged by developments in the aftermath of the 2012 Eurozone crisis, as the graphs below illustrate. Two key ‘fundamentals’ that private market participants would supposedly consider when pricing bonds are a country’s debt-to-GDP ratio and its overall GDP growth. Both of these were deteriorating sharply in Greece.

Graph 3: Real GDP for Greece

Graph 4: Central Government Debt (% of GDP) for Greece

So there we have it. Greek debt was rising significantly and their GDP had collapsed, all the while Greek’s bond yields were falling significantly (refer to graph 2).

This highlights the power of the ECB. A power that trumps all other economic fundamentals. This aligns with Post-Keynesian and Modern Money Theory (MMT) thought which emphasise that the central bank of a monetary sovereign sets the base interest rate in the economy, which bond yields then react to, as opposed to the market setting the rate they lend to the government.

When the next crisis struck in the form of Covid-19, the EU and its institutions appeared to have learned their lesson. Despite some divergence between Eurozone bond yields throughout 2022 and 2023, it was nothing compared to the divergences witnessed following the GFC. Yields also quickly converged again throughout 2024 and 2025.

Graph 5: 10-Year Government Bond Yields. Selected Eurozone Countries. 2015-2020.

What was different this time? Well, the OMT programme from 2012 was still in place, meaning markets continued to expect that the ECB was prepared to provide unlimited liquidity if necessary. On top of this, the ECB quickly announced a Pandemic Emergency Purchase Programme (PEPP). Rather than simply signalling its willingness to provide liquidity, as with OMT, the ECB proactively did so under PEPP, purchasing €1,850 billion worth of bonds throughout 2020 (European Central Bank, 2025). The European Commission also matched this shift in monetary policy with progressive changes in fiscal policy, including the suspension of the rules of the Stability and Growth Pact (SGP).

The difference in policy from the ECB and the Commission is clear when compared with their response to the GFC. They acted immediately and convincingly, assuring markets that liquidity would be provided and granting member states the freedom to deficit spend to deal with the pandemic. Concern about debt ratios well and truly went out the window.

These options are still available to the ECB and the Commission if they were to become seriously concerned about France’s “debt sustainability”. They can reinforce the OMT backstop, purchase bonds on the secondary market, and ditch the fiscal rules.

Recent Yield Rises:

The overall argument is that the so-called economic fundamentals that neoclassicals insist contribute to government bond yields are nonsense. Deficit ratios, debt ratios, and GDP growth rates do not, in themselves, determine yields on government debt in modern economies. It is no coincidence that, in the decade between the Eurozone crisis and the pandemic, ECB base rates (alongside those of other developed economies, such as the UK and the USA) were close to zero, and government bond yields broadly reflected this. This was despite significant differences in deficit and debt ratios, trade balances, and GDP growth rates. Then, following the pandemic, when central banks raised interest rates across the world, yields in secondary bond markets followed.

Again, after a few years of stagnating and gradually cutting rates, central banks are now raising them, and are expected to continue doing so. Therefore, yields are rising because traders expect inflation to persist and interest rates to remain high. This is not rocket science.

A quick international comparison may be useful. The table below reflects the Central Bank base rates, 10-year yields, and respective differences, for a handful of developed economies (as of October 19, 2026).

Table 1: Central Bank Policy Rates Vs. 10-Year Yields, October 19th, 2026.

[Table]
| Policy Rate | 10-year yield | Difference
USA | 3.75 – 4% | 5.1% | 1.1 – 1.4%
Australia | 4.6% | 5.3% | 0.7%
United Kingdom | 3.75% | 5.4% | 1.65%
Germany | 2.5% | 3.4% | 0.9%
Spain | 2.5% | 4.1% | 1.6%
France | 2.5% | 4.9% | 2.4%
[/Table]

The pattern is striking: the three countries with higher central bank policy rates (the USA, UK, and Australia) also have higher 10-year government bond yields than the Eurozone countries listed here, including debt-ridden France.

Of course, France’s spread between the ECB’s policy rate and its 10-year government bond yield is larger than in the other cases. This most likely reflects, at least in part, the political turmoil France has experienced over the past year. Uncertainty about the direction of future government policy, with Marine Le Pen on the far right and Jean-Luc Mélenchon on the left gaining political influence, may lead investors to demand a higher premium on French government debt. So, too, may the relentless media hysteria surrounding France’s national debt and fiscal deficit, exemplified by Paul Krugman’s commentary.

Similar arguments can be made about the UK. It has endured the same media hysteria surrounding its public finances, alongside considerable political instability, with successive changes of prime minister in recent years. These factors may also contribute to the premium investors demand on UK government bonds.

Conclusion:

Ultimately, the hysteria surrounding France’s debt reflects a fundamental misunderstanding of how money and government bond markets operate in the Eurozone. The experience of the 2010s demonstrated that when the ECB failed to act as a buyer of last resort, yields diverged sharply. Yet, once the ECB announced its willingness to provide unlimited liquidity, yields fell, despite Greece’s debt rising and its GDP collapsing. The supposed economic fundamentals that mainstream economists insist determine bond yields were clearly trumped by the ECB’s backstop guarantee.

Today, the situation is fundamentally different. The OMT programme remains in place, and the ECB has demonstrated, through its response to the pandemic, that it can provide liquidity and prevent another debt crisis. Meanwhile, rising yields across the world, alongside higher central bank policy rates, suggest that expectations of persistent inflation and higher interest rates are a far more plausible explanation for recent developments than fears of sovereign default.

This is not to deny that political instability and media hysteria can influence yields. However, the ECB retains the tools to prevent a liquidity crisis from becoming a sovereign debt crisis. The real question, then, is not whether France can afford to service its debt, but why we continue to treat money as the constraint when the ECB has already demonstrated otherwise.

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