EUROPEAN SOVEREIGN BAILOUTS, POLITICAL RISK AND THE ECONOMIC CONSEQUENCES OF MRS. MERKEL

The European economy was hit by a confidence shock in 2009 when the Greek government of Papandreou discovered the true amount of public deficit. The subsequent loss of trust in European fiscal governance reduced financial markets' willingness to lend to indebted governments. The European Union established the Financial Stability Facility to support debt-ridden states but without lasting success. The continuously rising Greek bond yields suggest...