In addition, investors made hardly any distinction between the bonds of individual member states. From 1999 to 2007 the average difference between EMU government bonds, excluding Germany, and German government bonds, for instance, was a mere 14 basis points. Just for comparison: at the end of March that spread stood at 123 basis points.
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.