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Disappearing Government Bond Spreads in the Eurozone

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Disappearing Government Bond Spreads in the Eurozone

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CEPS,

5 min read
5 take-aways
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What's inside?

Can the euro and the euro zone survive without democratic accountability?

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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.

Summary

In 2012, European Central Bank (ECB) president Mario Draghi announced the Outright Monetary Transactions (OMT) program, which assured markets of the euro zone’s continuity. In the interim, euro sovereign-bond spreads have dropped substantially, prompting economists to question the reason for that decline. The German Constitutional Court has ruled OMT illegal and called for terms that would inhibit the program’s efficacy. The German court based its thinking on the theory of efficient markets, which posits that market prices of securities reflect the sum of information on the fundamentals, or underlying value...

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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