Rising bond yields are exposing fiscal fantasy in Europe

As the FEARecb gdp Gdpeu that interest rates could stay higher for longer sinks in, government-bond yields are rising. America’s ten-year Treasury yields, at , are at their highest since 2007. The Bank of Japan has ramped up its bond purchases to maintain its . In Europe on October 4th the yield on ten-year German Bunds crossed 3% for the first time in more than a decade. Those on Italian debt are nearly 5%—the highest since the tail-end of the euro zone’s sovereign-debt crisis in 2012. And that is a worry, because Italy is one of the bloc’s most indebted member states and its government has not woken up to how its spending plans now look unsustainable.Over the past 15 months a surge in inflation in the euro zone has been met by dramatic action from the European Central Bank (), whichhas raised rates by 4.5 percentage points. Look at public spending, though, and you would not know that a battle against inflation is raging. Budgets ballooned in several big European countries as governments sought to help their citizens recover from lockdowns and an energy crunch. But even as those shocks have faded, deficits have remained wide. France projects a budget shortfall of nearly 5% of this year, and 4.4% next. Italy plans to run a deficit of 5.3% this year, and 4.3% in 2024. Its shortfall comes even as the country is on course to receive nearly €70bn ($74bn), equivalent to another 2% of annual , from the ’s common pandemic-recovery fund.