Economists Paul de Grauwe and Yuemei Ji
state the obvious
Economists now agree that markets were wrong in placing the same risk premium on Greek bonds as on German bonds
and then apply that same logic to the present
today the same markets are also wrong in overestimating the risk that the periphery countries will default.
And they have the
evidence to prove it
The systematic mispricing of sovereign debt observed in the Eurozone also has the effect of giving the wrong incentives to policymakers. During the boom years, when financial markets were blind to the sovereign risks, no incentives were given to policymakers to reduce their debts, as the latter were priced so favourably. Since the start of the financial crisis financial markets driven by panic overpriced risks and gave incentives to policymakers to introduce excessive austerity programmes. This panic has now been transmitted to the European Commission that is urging Eurozone countries to intensify budgetary austerity programmes while the Eurozone is moving into a recession – an extraordinary repeat of the 1930s.
