More evidence that financial markets imposed excessive austerity in the eurozone

by Paul De Grauwe and Yuemei Ji

Centre for European Policy Studies
February 5, 2013

In this Commentary, Paul De Grauwe and Yuemei Ji provide evidence to suggest that movements in the spreads in the eurozone – i.e. the difference between national government bond rates and the German rate – between 2010 and the middle of 2012, when the ECB announced its OMT (outright monetary transactions) programme, were driven by market sentiment. Later as the fear and panic subsided, thanks largely to the announcement of the ECB, these spreads declined spectacularly. On this basis, the authors argue that the timing and the intensity of the austerity programmes in the periphery eurozone member states have been dictated too much by market sentiment instead of being the outcome of rational decision-making processes.

Read the Commentary (PDF)