All in: Market expectations of eurozone integrity in the sovereign debt crisis

The behaviour of sovereign bond investors stands at the heart of the euro area debt crisis. By pushing upward the yields on the government debts of member states standing in the eurozone's periphery, investors caused, in a self-fulfilling way, the crisis that ultimately threatened the eurozone's integrity and the euro's survival. So how do we explain the behaviour of market investors before, during and after the eurozone's sovereign debt crisis? Why did investors not discriminate in their pricing of eurozone sovereign bonds before the crisis? Why did they abruptly change their minds in 2010? And why have they gradually felt reassured enough from mid-2011, depending on the country, to ask for significantly lower yields on sovereign bonds? To answer these questions, the paper argues that investors' confidence rests to a large extent on the expectation of the eurozone's solidarity, which is why large-scale multilateral solutions coming from the euro area were more successful in resolving the crisis than unilateral ones coming primarily from the debtor countries. As a result, this paper improves our understanding of the international political economy of financial (currency, bank and debt) crises by looking at the particular case of a monetary union with a single currency.