European Interest Rate Convergence an Anomaly

30/11/2011

IESE Economics Weekly, Economics Department Blog

Prior to 1998, European states had very different interest rates on 10-year bonds - a situation which changed dramatically after the introduction of the single currency, explains Prof. Rolf Campos of the IESE's Economics Department.

With the euro, interest rates converged and no longer reflected the risk inherent in the sovereign debt of individual countries, he said. "It's as if the market thought the European Central Bank would bail out certain countries." In the near future, he concludes, interest rates will become increasingly dispersed again.