Are sovereign spreads in the euro zone rational?

We examine euro-zone countries ’ 10-year government bond spreads against Germany. If the formation of sovereign spreads in the euro zone is rational, they should depend in particular on: Fiscal deficits and public debt ratios; External deficits; Potential growth rates; Potential climate problems (CO 2 emissions). We find that fiscal deficits, public debt ratios and current account balances significantly explain yield spreads with Germany. So there is some rationality in the formation of these spreads.