Covid 19: a new challenge for the European monetary union

Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries' resilience to the Covid shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) the Italian spread benefited most from the interventions of the European institution; 4) markets did not consider loans-based financial assistance program as working adjustment mechanisms as fiscal transfers would.