Don't Sweat the Bond Markets
How Eurozone Government Debt Works
Article Summary and Author Biography
News accounts often anticipate that political decisions (especially bad ones) will spell trouble in the market for government debt. In the short term, they will. But such fluctuations don't universally translate into long-term devaluations nor do they necessarily constrain governments.
LAYNA MOSLEY is a professor in the department of political science at the University of North Carolina at Chapel Hill.
Snapshot
The eurozone's troubles -- including the possibility of Greece's exit from the union -- no longer qualify as a crisis. What looks like significant instability is really just the slow-motion settling of the continent's new economic order.
Traders talk next to electronic boards at the stock exchange in Madrid. (Andrea Comas / Courtesy Reuters)
The ongoing eurozone debacle has driven home certain straightforward lessons: the fiscal rules enshrined in the EU's 1997 Stability and Growth Pact had almost no teeth, government bonds of EU nations are not a risk-free asset, and voters do not readily tolerate economic austerity. Beyond these, however, the last few years have also contained subtle lessons about the relationship between governments and capital markets. More specifically, they have shown that our understanding of the pressures that private capital markets place on governments is incomplete. Although holders of government debt certainly would react markedly to a change in the membership of the eurozone, they would not likely react strongly, or over the longer term, to many other government policy decisions and political outcomes. And these reactions have varying consequences for governments, depending on how governments have managed their debt profiles. Were the move toward eurobonds to come to fruition, some of these debt management decisions presumably would be made by EU-level, rather than national, authorities...
