Question

1-Why are interest rates normally similar for those European countries that use the euro as their currency?

2- why the government interest rate of one country could be slightly higher than the government interest rate of another country, even though the euro is the currency used in both countries?

If you can advise a book to read about the subject will be great

Answer 1

1) Answer : They don't have the same interest rates. The European Central Bank, like the Federal Reserve, sets overnight rates that banks charge each other to borrow from the reserves they hold at the central bank.The rate for an individual country's bonds will be determined by the market, and will reflect macroeconomic issues, capital flows, supply and demand and most importantly, credit risk.Germany, like the US, is assumed to have no credit risk and is the strongest economy in Europe, so the yields on Bunds are always going to be the lowest in the Eurozone. Italy, Greece and Spain are assumed to have some degree of credit risk, so their yields are much higher.

2 ) Answer : One way countries control their interest rates is by increasing or decreasing their money supply.For example, if Germany faces a positive demand pressure in their domestic goods market, they may want to raise their interest rates to stabilize their output. Meanwhile, Greece may face a negative demand pressure in their domestic goods market, and as a result they would want to decrease their interest rate to stabilize their output. Ideally, the eurozone has symmetric shocks and tight market integration, so the benefit of a set interest rate pay off. As a result the interest rates depend on the local market demand.

Books:

a. THE euro Crisis 2012

b. Unhappy Union