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Sudden Stops in the Euro Area

  • Silvia Merler
  • Jean Pisani-Ferry

The single currency was expected to make national balance of payments irrelevant for euro-area members. From 2010 onwards, however, governments, but also banks and non-financial companies in several euro-area countries have had difficulty getting access to non-resident financing. Assessing whether there has been a balance-of-payment crisis by looking at the current-account developments is a flawed approach in the case of countries that receive significant official support through assistance programmes or the Eurosystem of central banks. In this paper we document the evolution of private capital flows and formally test for the existence of ‘sudden stops’. We find that Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows that qualify as ‘sudden stops’. The timeline suggests contagion effects were present. We document the substitution of the private capital flows by public flows. In particular, we show that (weak) banks in distressed countries took up a major share of central bank refinancing, thereby contributing to the build-up of intra-Eurosystem net balances. The evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to systemic reform.

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Article provided by Università di Perugia in its journal Review of Economics and Institutions.

Volume (Year): 3 (2012)
Issue (Month): 3 ()
Pages:

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Handle: RePEc:pia:review:v:3:y:2012:i:3:n:5
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  1. Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
  2. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Hans-Werner Sinn, 2012. "The European Balance of Payments Crisis: An Introduction," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(SPECIALIS), pages 03-10, 02.
  4. Jean Pisani-Ferry & André Sapir & Benedicta Marzinotto, 2010. "Two crises, two responses," Policy Briefs 392, Bruegel.
  5. Ulrich Bindseil & Philipp Johann König, 2012. "TARGET2 and the European Sovereign Debt Crisis," Credit and Capital Markets, Credit and Capital Markets, vol. 45(2), pages 135–174.
  6. Whittaker, John, 2011. "Intra-eurosystem debts," MPRA Paper 38368, University Library of Munich, Germany.
  7. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
  8. Silvia Merler & Jean Pisani-Ferry, 2012. "Who's afraid of sovereign bonds?," Policy Contributions 695, Bruegel.
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