Cross-border spillovers in the euro area

The recent crisis has underlined that the cross-border transmission of shocks can be rapid and powerful in the euro area, where trade and financial interlinkages are strong and where confidence effects have been shown to be an important transmission mechanism. This article analyses the issue of cross-border spillovers in the context of the euro area. Close linkages imply that macroeconomic policies can have significant spillover effects. Cross-border spillovers from fiscal policy measures, for example, can be sizeable, with our model simulations showing that an increase in public investment in countries with fiscal space would generate significant positive spillovers to the rest of the euro area. Spillovers from structural reforms are generally found to be positive but small. However, our simulations also show that the simultaneous implementation of structural reforms throughout the euro area would have a bigger effect on output than they would if implemented by countries in isolation, highlighting the benefits of coordinated policy action. A review of the literature on spillovers from financial shocks shows evidence of contagion effects in general; spillovers between banks and between banks and sovereigns; and spillovers emanating from ëcoreí as well as ëperipheralí countries. An analysis of sovereign co-risk measures in the euro area shows that spillovers across Member States are heterogeneous and asymmetric. Greece, Spain, Portugal and Ireland, for example, appear to be a source of spillovers among themselves but are also vulnerable to spillovers from a number of ëcoreí countries. Some ëcoreí countries, by contrast, appear to be a source of sizeable spillovers to other Member States without being considerably affected in return.