A sectoral net lending perspective on Europe[Fiscal, foreign, and private net borrowing: widely accepted theories don’t closely fit the facts]

We characterize sectoral behavior leading up to and during the Great Recession using recently available net lending and net borrowing flows of the institutional sectors in Europe and applying simple statistical derivations. We find that (1) many countries of the Northern group featured low public deficits or even budget surpluses, current account surpluses and a private sector in a net lending position, while countries of the Southern periphery, the Anglo-Saxon countries and many Eastern European economies took the mirror image; (2) with the onset of the crisis, private net lending soared in all countries, while all governments incurred deficits, consistent with the notion of a balance sheet recession; (3) private net lending is pro-cyclical while public net lending is countercyclical in all countries; (4) household net lending tends to lead the business cycle, while corporate net lending tends to lag it; and (5) prominent concepts asserting causal relationships in sectoral net lending, such as Ricardian equivalence and the twin deficit hypothesis, are not supported by our data.