The confidence that financial markets are able to discipline the debt behaviour of governments in the euro area is not very high. One possible reason could be that the European Central Bank accepts all European government bonds without distinction in its monetary policy auctions as collateral. This could provide the financial market with a signal that these government securities are equally (non)risky and that a differentiation with respect to risk premiums is not needed.
Ullrich, Katrin (2006), The Impact of Country-Specific Economic Developments on ECB Decisions, ZEW Discussion Paper No. 06-049, Mannheim. Download