Since 1999, government bond yield spreads have mainly reflected differences in liquidity and in perceived credit risks, which in turn reflect the sustainability of the countries’ fiscal positions. I will highlight two implications. First, such “local factors” continue to have an impact on bond yields in various euro area countries.
This is the opposite of what we need at a time when interest rates are near the lower bound and fiscal policy is a transmission channel of monetary policy. The second risk comes from the inequality that will likely result from the outsized impact of the pandemic on less advantaged groups.