03 Apr 2009

Gains for All: A proposal for a common Eurobond

Wim Moesen / Paul De Grauwe

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Until the eruption of the credit crisis in August 2007 financial markets were gripped by a ‘flight to risk’. The perception was that risks were very low. This perception was fed by the rating agencies that liberally distributed top ratings to dubious assets. Dulled by this low risk perception, investors and financial institutions accumulated vast amounts of risky assets on their balance sheets. Today the markets have moved to the other extreme and perceive risks everywhere. They are now gripped by a ‘flight to safety’. This has profound implications for the workings of the government bond markets in the eurozone. In this new CEPS Commentary, Paul De Grauwe and Wim Moesen explain how authorities can attempt to offset the distorting effects these cycles produce. P. De Grauwe is Professor of Economics at the University of Leuven and Senior Research Fellow at the Centre for European Policy Studies and W. Moesen is Professor at the University of Leuven.