Euro-area governments have issued bonds worth over seven trillion euros, just under a quarter of which were German bonds. The financial crisis illustrated how seriously a withdrawal by investors can affect governments’ funding. This disciplining effect of the capital markets is instrumental in helping monetary union to function properly.
The capital markets have not always performed this function in the past, an insight which also became clear during the crisis. The significant fall in long-term interest rates in some euro-area countries over the last few months has also reduced these countries’ borrowing costs. However, there is a risk that market valuations may be running ahead of the adjustment processes.