Since late summer 2007 financial markets have been in a state dubbed by the ECB as a “reappraisal of risk”. This has been most pronounced with respect to the credit market but seems now to have reached EMU government bonds as well.Yields on 10yr Italian government bonds are now some 60 basis points above those on the German 10yr benchmark – up from an average of 20 basis points since the start of EMU. Those of Spanish 10yr are trading at 36 basis points – up from an average of 10 basis points.This spread widening comes at a time when the EMU business cycle shows the strongest divergence in confidence since the immediate impact of German reunification. While German confidence indicators even show some signs of strengthening since early 2008, and French indicators are holding up reasonably well those for Spain and Italy are caving in.
Stephen Kinsella
Economist at the University of Limerick
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