Blog Post

Capital flight in the Euro area: from bad to worse

In a recent policy contribution we investigated the dynamics of capital flows in five Southern euro area countries. We found that Greece, Ireland, Portugal, Spain and Italy all experienced significant private capital inflows from 2002 to 2007-2009, followed by unambiguous and rather sudden outflows. The sudden stops are concentrated in three waves (figure 1): the […]

By: and Date: July 13, 2012 Topic: Macroeconomic policy

In a recent policy contribution we investigated the dynamics of capital flows in five Southern euro area countries. We found that Greece, Ireland, Portugal, Spain and Italy all experienced significant private capital inflows from 2002 to 2007-2009, followed by unambiguous and rather sudden outflows. The sudden stops are concentrated in three waves (figure 1): the global financial crisis in 2008/09; spring 2010 in correspondence to the Greek Programme and summer 2011. Updated figures show that the latest wave of sudden stops is still ongoing, with the reversal of capital flows affecting especially Italy and Spain.

Figure 1

Source: authors calculations

These reversals are large enough to qualify as a “sudden stops” (a common feature of balance-of-payment-crises in emerging countries) but have been cushioned by equally sizable inflows of public capital flows, namely the disbursement of EU/IMF programme and (or exclusively, in the case of Italy and Spain) the liquidity provided by the Eurosystem (figure 2).

Figure 2 – Private and public capital flows in Italy and Spain

Source: authors calculation with data from National Central banks

Updated statistics show that the situation is not improving. During the last months of 2011 and the first months 2012 the private capital flight from the periphery has accelerated, affecting especially Spain and Italy. As a consequence, in these countries the reliance of banks on Eurosystem liquidity has grown to unprecedented levels (Figure 3).

Figure 3 – Use of Eurosystem liquidity by country (share of total LTRO + MRO)

Source: authors calculation with data from National Central banks

An interesting question in view of such evidence is what banks have been doing with the huge amount of liquidity they have received from the Eurosystem. Earlier this year, we showed that since the beginning of the crisis domestic banks have been increasingly substituting non-residents in the holding of peripheral countries’ government securities. An update of the underlying data (figure 2) suggests that this trend is continuing – if not accelerating – in Italy and Spain.

Figure 4 – Share of domestic banks and of non-residents in total holding of government securities (Italy and Spain)

Source: authors calculation with data from National Central banks

The outflow from the peripheral government capital markets has been impressive and the flight from the government bond markets constitutes a large (even if not exclusive) part of it. What is even more worrying, is that in almost all the countries in trouble, the share off loaded by non-residents is being constantly taken up by domestic banks[1]. This move – advocated explicitly by some politicians at the end of last year – increases the vulnerability of euro area countries. By reinforcing the sovereign-banking vicious cycle it deepens the crisis of confidence that has been driving private capital out of the periphery in the first place, rising at the same time serious doubts on the effectiveness of the Eurosystem’s extraordinary measures in tackling the roots of the problem.

References

Merler, S. and Jean Pisani-Ferry (2012) – “Who’s afraid of sovereign bonds?”, Bruegel Policy Contribution 2012|02, February

Merler, S. and Jean Pisani-Ferry (2012) – “Sudden Stops in the Euro area”, Bruegel Policy Contribution 2012|06, March


[1] Italy is to some extent an exception, because non-financial residents have absorbed a large part of the significant drop in non-resident bond holdings.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Peter Bøegh Nielsen, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Hannu Piekkola, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

Taming inflation?

What are the implications of prolonged inflation?

By: The Sound of Economics Topic: Macroeconomic policy Date: May 25, 2022
Read about event More on this topic
 

Past Event

Past Event

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2022
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Load more posts