The "imbalanced balance" and its unravelling: current accounts and bilateral financial flows in the euro area

Alexandr Hobza and Stefan Zeugner

No 520, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: Based on a new database of bilateral financial flows among euro area countries and their major world partners, this paper explores the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area. The data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the 'core' with deficits in the periphery went along financial rather than trade interlinkages. In particular, the data document the dominant role of 'core' countries in financing the euro area periphery's current account deficits before the financial crisis. In addition to direct financing, France and the UK acted as important intermediaries of financial flows from elsewhere, particularly outside of the euro area. Most of this financing took the form of debt instruments and increased the vulnerability of the recipient countries. In 2009/10, gross flows in the euro area contracted, while the net flows remained broadly unchanged. France became the periphery's main financier in 2009 and substituted the withdrawn flows from surplus countries, mainly Germany. Only when France reduced its exposure in a hasty asset withdrawal during 2011, the periphery had to rely on large ECB-mediated liabilities in order to refinance its liabilities.

JEL-codes: F32 F34 F36 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-07
New Economics Papers: this item is included in nep-acc, nep-eec and nep-opm
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Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0520

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