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Disappearing Government Bond Spreads in the Eurozone
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Disappearing Government Bond Spreads in the Eurozone

Back to Normal?

Paul De Grauwe and Yuemei Ji
CEPS, 2014
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Editorial Rating

8

Qualities

  • Analytical
  • Scientific
  • Visionary

Recommendation

Spreads on sovereign debt in 2014 are far more amenable to euro-zone governments than they were in 2010 to 2012, yet the finances of many of the peripheral members are far from healthy. The breathing space afforded by lower rates is largely due to intervention from the European Central Bank (ECB), whose actions have drawn sharp rebuke from some, particularly in Germany. getAbstract recommends this brief paper for its cogent analysis of the euro sovereign-debt markets, the opposition to ECB programs and the implications of political union on the future of the euro.

Take-Aways

  • The European Central Bank’s 2012 Outright Monetary Transactions (OMT) program calmed markets and assured them of the euro zone’s continuity.
  • In the interim, euro sovereign bond spreads have dropped substantially, prompting economists to question the cause of that decline.
  • The German Constitutional Court’s decision against OMT relies on the efficient market theory, which says that underlying fundamentals solely drive market prices. The court holds that OMT constitutes market interference by the European Central Bank (ECB).

About the Authors

Paul De Grauwe is a professor at the London School of Economics. Yuemei Ji is a researcher at Brunel University.

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