Dissertations, Theses, and Capstone Projects

Date of Degree


Document Type


Degree Name





Thom Thurston

Committee Members

John Devereux

Christos Giannikos

Subject Categories

Economic History | Finance | Finance and Financial Management | Other International and Area Studies | Political Economy


euro capital flows eurozone bonds debt liabilities


A developed bond market which attracts nonresident investors both enables and reflects a host currency’s transition from domestic to international status. My analysis of historical private nonresident holdings of Eurozone portfolio debt securities spanning the euro’s 1999 creation and its subsequent 2008 crisis reveals diverging patterns.

This analysis, complemented by coefficient stability tests, discovers that the conversion of national currencies to the euro was reflected by a pickup in nonresident holdings of bonds issued by countries adopting the euro, especially those of the periphery (Portugal, Ireland, Italy and Spain) relative to the core (Germany, Austria, Belgium, Finland, France, and the Netherlands).

Parallel to this relative pickup in nonresident holdings of bonds, periphery over German interest rate spreads narrowed toward zero. The overall Eurozone sovereign markets had been scaling up and trading as one unified market−much like that for US Treasuries−where German bonds were interchangeable with Italian. This seemed to signal the Eurozone bond market’s fulfilment of its role as a pillar enabling and reflecting the euro’s transformation from a domestic to an international currency.

Alas, this scaled up Treasury-like Eurozone bond market was fleeting and more than reversed following the subsequent 2008-2012 Irish banking and Greek fiscal crises.

The earlier enthusiasm for the euro and euro-denominated bonds dissipated and was swamped in an opposite direction when the euro risked reverting back to national currencies. Thus, Eurozone bonds became less interchangeable and resumed trading on scaled down national bases; periphery to German spreads again widened. Instead of a large unified bond market satisfying global liquidity needs, the Eurozone was left with a down-scaled market trading on a fragmented and national basis serving local and regional, rather than global, liquidity needs.

Such fragmentation continues to deter the euro from attaining an international status and relegates it to a regional status. This lends credence to the now prevailing view that current Eurozone financial market architecture is in need of reforms including, inter alia, a common capital markets regulator and deposit insurance scheme, a common fiscal policy with a mutualized sovereign debt market, and even elimination of nation-based bond markets. Such reforms would allow the role of Eurozone bond markets to evolve from one of constraining to that of enabling the euro’s internationalization.