Hale, G. & Obstfeld, M. (2014) “How the euro changed the pattern of international debt flows“, VoxEU Organisation, 15 May.
Large flows of bank lending from core countries in the Eurozone to the periphery lead to large financial imbalances. This column explains what motivated such financial flows. With the advent of the Eurozone, banks in core countries gained relative advantage in lending to the periphery, making such lending very attractive. They also served as intermediaries for financial flows from outside the Eurozone to the periphery. Now – five years since the start of the euro crisis – Eurozone financial markets remain segmented.
Internal financial imbalances within the Eurozone were central to the development of the European debt crisis. They resulted in a concentration of European periphery risks on the balance sheets of banks located in core Eurozone countries (Lane 2012, Rey 2012, Shin 2012). They also promoted larger intra-Eurozone current-account deficits and a sharp fall in peripheral bond yields, accompanied by a loss of competitiveness of the peripheral economies, most strikingly relative to Germany (Chen et al. 2013, Shambaugh 2012). But these real imbalances could not have occurred without large flows of bank lending from the core to the periphery of the Eurozone (Hale 2013). What motivated these large financial flows?
Relevant posts:
- Reinhardt, D. & Riddiough, S. (2014) “The two faces of cross-border banking flows: An investigation into the links between global risk, arms-length funding, and internal capital markets“, VoxEU Organisation, 07 May.
- Buti, M., Demertzis, M. & Nogueira Martins, J. (2014) “Delivering the Eurozone Consistent Trinity“, VoxEU Organisation, 30 March.
- International Monetary Fund (2012) “External Imbalances in the Euro Area“, European and Western Hemisphere Departments, IMF Working Papers, N. 12/36.