Euro periphery countries are in debt and are having to pay elevated rates to borrow. Why? It’s because their outgoings have exceeded their income for some years, that is, they have a balance payments problem, as this Deutsch Bank paper explains.
And for another explanation, see this by Brian Ashcroft (former economics prof. at Strathclyde Business School).
And the solution to a balance of payments deficit if you have your own currency is to devalue. But EZ countries can’t devalue. So they have to cut costs, and that is currently achieved in the EZ in a slow painful way: deflation in periphery countries.
Unfortunately a number of economists don’t seem to get it, e.g. Paul Krugman and Warren Mosler. They seem to think periphery problems can be solved simply by having the ECB buy periphery debt, which of course takes away the pain of deflation, but it simply extends the time taken to cure the basic problem (or prevents the cure ever being achieved).
Paul Krugman (who rarely puts a step wrong) suggests here that the fact that the ECB looks like it is going to support France come what may means that France can escape austerity.
Wrong. The ECB can support France for a few more years yet. But if France doesn’t cut its costs relative to Germany, France’s debts will simply pile up further and further. The day of reckoning will come.
P.S. (23rd April 2013). Another example of someone who doesn't "get it". And (a refreshing change) someone who does.