I leave it to you to decide whether this was because investors were neglecting the growing differences in economic fundamentals or because they never really believed that the no bail out clause would hold when the going got tough. In any case, the strong convergence in financing conditions set the wrong incentives: governments’ purses were loosened, not tightened, structural reforms were postponed, not pushed.
By the same token, banks and capital markets in many cases failed to allocate the inflowing capital efficiently. Instead of financing productive investment they shifted money into ballooning real estate sectors. As a result, banking systems in some euro-area countries were subsequently hit hard by a severe crisis.