Updated in February 2025, this case examines the eurozone from the perspective of core and periphery long-term rates. By 2010, the "Great Convergence" in eurozone long-term rates during the late 1990s had given way to the "Great Divergence," in which German long-term yields fell to record lows while Greek yields bounced between 20% and 40%. Periphery bond markets improved sharply in late summer 2012 after European Central Bank (ECB) President Mario Draghi committed to doing "whatever it takes" to preserve the euro, leading to another convergence in yields. Since the COVID-19 pandemic, the ECB has implemented a hitherto unthinkable differential bond-buying program to reduce "fragmentation" in member countries' bond markets. Following the supply shock associated with the 2022 Russian invasion of Ukraine, inflation spiked to a 40-year high, prompting the ECB to raise its policy rate for the first time since 2011, getting it to 4% in 2023 before loosening starting in mid-2024.
The protagonist has two decisions to make. First, what was the path of core (i.e., German) eurozone long-term interest rates likely to be over the next year? Was the pre-Russia/Ukraine-conflict period of roughly 0% German long rates the norm? Or was the recent surge to near 4% a return to the pre-global-financial-crisis normality, meaning that the period from 2008 through 2021, which saw unprecedented quantitative easing, was the anomaly? Second, how would periphery long rates evolve relative to core rates? That is, how would the spread between long rates in Greece, Italy, Portugal, and Spain (the GIPS countries) and those in Germany evolve over the next year? Again, what was the norm? Which was to be expected: another dramatic divergence in eurozone long rates as occurred in 2010/11, or a continuation/resumption of the impressive reconvergence that began in the second half of 2012?
This case is used in Darden’s first- and second-year "Global Financial Markets" elective. It is appropriate for economics courses covering international and macro topics and for courses in international finance.
