05 Feb 2013

More evidence that financial markets imposed excessive austerity in the eurozone

Paul De Grauwe / Yuemei Ji

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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.

Paul De Grauwe is John Paulson Professor in European Political Economy at the London School of Economics and Senior Associate Research Fellow at CEPS. Yuemei Ji is a researcher at LICOS Centre for Institutions and Economic Performance, University of Leuven.