The Euro and the Geography of International Debt Flows

Abstract

Greater financial integration between core and peripheral European Monetary Union (EMU) members not only had an effect on both sets of countries but also spilled over beyond the euro area. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. We present a stylized model that illustrates possible mechanisms for these developments. We then analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, core EMU countries increased their borrowing from outside of the EMU and their lending to the EMU periphery. Moreover, we present evidence that large core EMU banks' lending to periphery borrowers was linked to their borrowing from outside of the euro area.

The geography of the great rebalancing in euro area bond markets during the sovereign debt crisis

“…According to this hypothesis proposed by Hale and Obstfeld (2014), a large part of foreign investments in stressed euro area countries' capital markets prior to the sovereign debt crisis had been intermediated through non-stressed countries. If this channel was empirically relevant in the CPIS data, the coefficient estimates for the dummy variables "NonEA to NonStressed" and "Non-Stressed to Stressed" in column (3) in Table 1 would be negative and statistically significant.…”

Estimating the effect of the EMU on current account balances: A synthetic control approach

“…Arghyrou and Chortareas (2008) and Belke and Dreger (2013) investigate the effect of differences in external competitiveness on the current account balances of EMU member states and find a significant negative relationship between real exchange rates and current account balances. Schmitz and von Hagen (2011) and Hale and Obstfeld (2016) find evidence that the EMU significantly increased capital flows from the relatively richer northern member states to the relatively poorer southern member states. There are also a number of empirical studies that find that the EMU led to an increase in expansionary and electorallymotivated fiscal policy (Buti and Van Den Noord, 2004;Efthyvoulou, 2012;Mink and De Haan, 2006), as well as a rise in overly optimistic budget deficit forecasts aimed at misleading electorates, especially in the run up to elections (Brück and Stephan, 2006).…”

“…The EMU furthered integration in banking and capital markets and dramatically reduced the borrowing costs for the less-creditworthy member states in the south. This increased capital flows from the north to the south, leading the former to accumulate current account surpluses and the latter to accumulate current account deficits (Bertola et al, 2013;Hale and Obstfeld, 2016). Current account imbalances fuelled by cross-border borrowing can be viewed as benign if they reflect a reallocation of resources from high-income countries with abundant capital to low-income countries with better growth prospects and investment opportunities (Blanchard and Giavazzi, 2002).…”

Nierównowaga zewnętrzna w krajach strefy euro

“…1 -kapitał płynie od krajów zamożniejszych do krajów uboższych (por. Schmitz, von Hagen 2009;Hale, Obstfeld 2014). O ile kierunki nie są zaskoczeniem, narastająca skala tych przepływów powinna była skłonić kraje strefy euro do podjęcia działań korygujących, które nie nastąpiły.…”