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

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.

Topics

Comments

Read article More on this topic More by this author

Blog Post

Silvia Merler

EU migration crisis: facts, figures and disappointments

Attempts to stem the flow of refugees to Europe have so far had little success. Two months into 2016, we take a detailed look at the numbers of the refugee crisis and the European response.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: February 12, 2016
Read article More on this topic

Opinion

Pia Hüttl
Schoenmaker pic

Why euro-zone ‘outs’ should join banking union

Joining the banking union could provide a stable arrangement for managing financial stability for the UK and other non-Euro countries.

By: Pia Hüttl and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: February 11, 2016
Read article

Blog Post

IMG_20151009_103117 (3)
Portraits Bruegel staff 2014

Can mass migration boost innovation and productivity?

The long-term impact of migration on innovation and productivity growth in host countries is a neglected issue in the current debate on refugees. Research shows that these effects can be substantial, but if Europe wants to capitalize on this potential it will need better information systems to match migrants’ skill sets with host environments.

By: Nuria Boot and Reinhilde Veugelers Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 10, 2016
Read article More by this author

Parliamentary Testimony

Inquiry of the House of Lords’ EU Financial Affairs Sub-Committee on “Completing Europe’s Economic and Monetary Union”House of Lords

Inquiry of the House of Lords' EU Financial Affairs Sub-Committee

The enquiry on "Completing Europe’s Economic and Monetary Union" took place on 27 January 2016 in Brussels.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, House of Lords, Parliamentary Testimonies Date: February 8, 2016
Read article More on this topic

Blog Post

Pia Hüttl
Schoenmaker pic

European banking union: should the 'outs' join in?

To address coordination failures between national institutions regulating banks, we need supranational policies. Banking union encourages further integration of banks across borders, deepening the single market, and could also benefit countries outside the euro which have a high degree of cross-border banking.

By: Pia Hüttl and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: February 4, 2016
Read article Download PDF More on this topic

Policy Contribution

Should the ‘outs’ join the European banking union?

Should the ‘outs’ join the European banking union?

This paper analyses the banking linkages between the nine ‘outs’ and 19 ‘ins’ of the banking union. It finds that the out countries could profit from joining banking union, because it would provide a stable arrangement for managing financial stability.

By: Pia Hüttl and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: February 4, 2016
Read about event More on this topic

Upcoming Event

22 
Feb
2016
12:30

Economic weakness and demographic challenges: what next for Europe?

After a year of weak recovery what is next for Europe? This event will look at both the general macroeconomic situation as well as the challenges posed by changing demographics

Speakers: John Driffill, Torben M. Andersen and Pia Hüttl Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

The economic consequences of Schengen

The president of the European Commission, Jean-Claude Juncker, recently warned that “without Schengen and the free movement of workers, of citizens, the euro makes no sense.” And in fact, it is the single currency and the ability to travel freely without identity documents that most Europeans associate with the EU. So how does it really stand with Schengen and the euro?

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: February 2, 2016
Read about event More on this topic

Upcoming Event

23 
Feb
2016
12:30

Adjustment in the Economic and Monetary Union

This event will look at shocks and adjustment in the euro area in the light of recent crises and analyse the functioning of a key internal adjustment process in EMU

Speakers: Robert Anderton, Antoine Berthou, José Leandro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Blaming the Fed for the Great Recession

What’s at stake: Following an article in the New York Times by David Beckworth and Ramesh Ponnuru, the conversation on the blogosphere was dominated this week by the question of whether the Fed actually caused the Great Recession. While not mainstream, this narrative recently received a boost as Ted Cruz, a Republican candidate for the White House, championed it.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: February 1, 2016
Read about event More on this topic

Upcoming Event

25 
Feb
2016
12:30

The long-term impact of migration in Europe

Amidst the short-term drama of the refugee and Schengen crises, it is time to look at the long-term effects of migration on European societies and economies.

Speakers: Pieter Cleppe, Naika Foroutan and Reinhilde Veugelers Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

The fallout from the European refugee crisis

Of the 1.5 million refugees that reached the European Union last year, more than 1 million ended up in Germany, but the initially welcoming atmosphere has changed drastically.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 29, 2016
Load more posts