Blog Post

An inexorable spiral?

Some market participants seem to consider financial support from the euro area governments, either in bilateral form or in the EFSF (and tomorrow ESM) guise, as the first step in an inexorable spiral, in which yields get higher and higher and market access is pushed further and further into the future. In short, the European […]

By: Date: February 4, 2013 Topic: European Macroeconomics & Governance

Some market participants seem to consider financial support from the euro area governments, either in bilateral form or in the EFSF (and tomorrow ESM) guise, as the first step in an inexorable spiral, in which yields get higher and higher and market access is pushed further and further into the future. In short, the European cure (financial support-plus-macro-structural-adjustment) does not work (whatever its precise calibration with more or less fiscal adjustment) and there is only one possibility: more and more cases of PSI, soon for Ireland and Portugal, somewhat later for Spain and Italy. Greece’s case is generalized into a universal rule.

There is one important indicator which tells a very different story: two of the three countries that have taken for a sufficiently long period the European cure, i.e. Ireland and Portugal, show dramatic and sustained improvements in the yield on their government securities. For the 10 year maturity, this has gone from a peak above 17% at the end of January 2012 to the current level just above 8% in the case of Portugal.  In the case of Ireland the improvement has been even more dramatic: from a peak of about 14.5% in mid July 2011 to the current level below 5% (about the same as Italy and lower than Spain).

Even more drastic developments can be found in 2 year yields (IE peak level higher than 24% on 18/07/2011, below 2% now, lower than both Italy and Spain, and PT peak level higher than 20% also on 18/07/2011 and close to 4% now). It is not easy to find assets that have recorded a higher rate of return than Irish and Portuguese securities over the last 12 months. In addition, in all cases, yields are now well below the level prevailing when the relative program was started.

Of course, the liquidity of Irish and Portuguese government bonds is hesitant and the prices generated in the relevant markets have to be taken with a pinch of salt. It is therefore reassuring that the price improvement is confirmed on the quantity side by the fact that both Portugal and Ireland managed recently to regain access to the bond market, albeit not yet systematically.

Of course, the yield is just an indicator and a more thorough analysis is needed to ascertain whether macroeconomic convergence is taking place in Portugal and Ireland. Evidence relating to labour costs is contained in a recent Bruegel piece by Guntram Wolff and Carlos de Sousa which show that, in these two countries, unit labour costs indices are indeed significantly moving down with respect to the euro-area average, also under the pressure of growing unemployment.  However, the assessment whether more generalized macroeconomic convergence is taking place is another story, deserving another treatment.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Read article More on this topic More by this author

Blog Post

The challenge of fostering financial inclusion of refugees

Creation of a European identification for refugees and a pan-European registry would encourage better financial inclusion, along with clear guidelines about financial regulation and public-private partnerships

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 13, 2017
Read about event More on this topic

Past Event

Past Event

Better policies for people on the move

This event will discuss the impact and integration of migrants as well as national and European immigration policy challenges

Speakers: Manu Bhardwaj, Elizabeth Collett, Zsolt Darvas, Eva Degler, Maria Demertzis, Arjen Leerkes, Rainer Münz, Matthias Oel, Alessandra Venturini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 13, 2017
Read article More on this topic More by this author

Blog Post

Support for intra-EU mobility of people is on the rise

Europeans’ enthusiasm for immigration from other EU countries is steadily increasing –two-thirds of the EU population, on average, now support it.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 12, 2017
Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read about event More on this topic

Past Event

Past Event

Health care and macro-economics in Europe

What are the strengths and challenges of health care systems in each EU country? What are the common policy priorities and opportunities for EU value added?What role do healthcare systems play in public finances and macroeconomic developments? What are the economic values of investing in healthcare?

Speakers: Zsolt Darvas, Caroline Costongs, Per Eckefeldt, Sylvain Giraud, Petra Laux, Xavier Prats Monné and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

How the EU has become an immigration area

Natural change of EU28 population (the balance of live births and deaths) has fallen from high positive values in the 1960s to essentially zero recently, while the previous close-to-zero net immigration has turned positive and, since the early 1990s, become a more important source of population growth than natural increase

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Load more posts