Italian bank analysts combed through years of data and applied advanced mathematics to try to understand the country’s rising interest rates. But what sparked a breakthrough this summer was a blunter tool: a look at the number of Google searches for phrases such as “euro breakup” and “end of euro.”
The finding was stark. Such searches peaked at the same time that the rates on Italian government bonds were spiking. This suggested that there was a link between investors’ concern about putting their money in Italy and their more general anxiety about whether the euro zone as a whole might break apart.
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This observation by analysts with the Italian central bank added to other evidence that Italy’s borrowing costs were no longer solely related to economic conditions inside the country or the health of its government finances. These costs were also being driven higher by events beyond Italy’s control — in particular, the fear that it and other countries could be forced out of the currency union.
“Concerns about the fragility of the euro are increasingly and widely mentioned by a number of market observers and have apparently caught the attention of the public at large,” a Bank of Italy report said in September. The analysts pointed to the “Google-based indicator” as proof Italy was being punished with higher rates for something over which it had little influence.
Initially, it was politicians from cash-strapped countries and a handful of economists who maintained that a few individual European countries such as Italy and Spain were being unfairly burdened because global investors were fearful about the euro zone’s fate as a whole.
But that argument has found a wider audience in recent months and provided the European Central Bank with a justification for its dramatic shift in how it approaches the euro zone’s problems. After years of reluctance, ECB officials say they will spend as much money as necessary to control runaway interest rates and stabilize conditions in euro-zone countries. The announcement by ECB President Mario Draghi last month that the central bank would buy the bonds of ailing governments in unlimited amounts helped bring some bond rates down from dangerous levels and gave global markets a boost.
Draghi said at a London speech in July that interest rates in Italy and Spain were being forced up by something called “convertibility risk” — essentially a premium demanded by investors who think a country might be forced to leave the euro zone and revert to a different currency, say the Italian lira or Spanish peseta, undercutting the value of government bonds.
By linking the surge in Italian and Spanish interest rates to causes outside the control of local officials, the ECB could justify an initiative that might otherwise have been impossible in a continent divided between struggling countries in southern Europe and more successful ones to the north. Draghi argued that the ECB needed to assert itself so interest rates and other conditions could be brought into line for all euro members.