Emu Deepening and Sovereign Debt Spreads: Using Political Space to Achieve Policy Space

Sovereign spreads within the European Monetary Union (EMU) arise because markets price-in heterogeneous country fundamentals, but also re-denomination risks, given incomplete nature of EMU. This creates a permanent risk financial fragmentation area. In this paper we claim that political decisions signal commitment to safeguarding adequate functioning euro area influence investors’ valuations. We focus on conducive enhancing institutional framework (“EMU deepening”). To test our hypothesis build comprehensive narrative events (decisions) from all documents and press releases issued by Council EU during period January 2010 March 2020. categorize as dealing with: (i) economic integration; (ii) fiscal policy; (iii) bailouts. With extremely rich at hand, conduct event-study regressions with daily data assess impact sovereign bond yields find indeed integration drive down periphery spreads. Moreover, while key subjects present robust effect, is not case prior discussions those level. Finally, show impacts reductions in peripheral spreads, opposite movement core countries. conclude policy-makers have their disposal significant “political space” reduce gain “policy space”.