Publication

This paper examines how fear concerning state bond markets in Europe influenced the severity of imposed austerity. The authors argue that panic pushed national spreads (the difference between national government bond rates and the German rate) to artificially high levels which prompted the European authorities to impose excessive austerity. European spreads have decreased since the European Central Bank's (ECB) announcement of its Outright Monetary Transaction program, in spite of rising debt-to-GDP ratios. The authors argue that had the ECB acted earlier, panic could have been averted and excessive austerity might have been avoided.