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Country adjustment to a ‘sudden stop’: Does the euro make a difference?

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  • Daniel Gros
  • Cinzia Alcidi

Abstract

A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete.

Suggested Citation

  • Daniel Gros & Cinzia Alcidi, 2013. "Country adjustment to a ‘sudden stop’: Does the euro make a difference?," European Economy - Economic Papers 2008 - 2015 492, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0492
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    References listed on IDEAS

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    Cited by:

    1. repec:liu:liucej:v:14:y:2017:i:2:p:177-195 is not listed on IDEAS
    2. Michael Stemmer, 2017. "Revisiting Finance and Growth in Transition Economies - A Panel Causality Approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01524462, HAL.
    3. Ansgar Belke & Daniel Gros, 2017. "Greece and the Troika – Lessons from International Best Practice Cases of Successful Price (and Wage) Adjustment," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 14(2), pages 177-195, December.
    4. Philip R. Lane, 2014. "International Financial Flows and the Irish Crisis," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(2), pages 14-19, April.
    5. repec:wsi:jicepx:v:08:y:2017:i:03:n:s1793993317500168 is not listed on IDEAS
    6. Valentina Milano, 2017. "Risk Sharing in the Euro Zone: the Role of European Institutions," Working Papers CELEG 1701, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    7. repec:zbw:rwirep:0482 is not listed on IDEAS
    8. Belke, Ansgar & Gros, Daniel, 2017. "Optimal adjustment paths in a monetary union," Economic Modelling, Elsevier, vol. 67(C), pages 338-345.
    9. Cavallo, Eduardo A. & Fernández-Arias, Eduardo & Powell, Andrew, 2014. "Is the Euro-zone on the Mend? Latin American examples to analyze the Euro question," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 243-257.
    10. Herrmann, Sabine & Jochem, Axel, 2013. "Current account adjustment in EU countries: Does euro-area membership make a difference?," Discussion Papers 49/2013, Deutsche Bundesbank.
    11. Philip R. Lane, 2015. "Macro-Financial Stability under EMU," Trinity Economics Papers tep0615, Trinity College Dublin, Department of Economics.
    12. Ansgar Belke & Daniel Gros & Alcidi Cinzia & Leonor Coutinho & Alessandro Giovannini, 2014. "Exit State-of-play in Implementing Macroeconomic Adjustment Programmes in the Euro Area," ROME Working Papers 201405, ROME Network.
    13. Gelman, Maria & Jochem, Axel & Reitz, Stefan, 2016. "Transmission of global financial shocks to EMU member states: The role of monetary policy and national factors," Discussion Papers 23/2016, Deutsche Bundesbank.
    14. Gros, Daniel & Alcidi, Cinzia & Belke, Ansgar & Coutinho, Leonor & Giovannini, Alessandro, 2014. "State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area," Ruhr Economic Papers 482, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    15. Cavallo, Eduardo A. & Fernández-Arias, Eduardo & Powell, Andrew, 2014. "Is the Euro-zone on the Mend? Latin American examples to analyze the Euro question," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 243-257.
    16. Schoenmaker, Dirk & Wierts, Peter, 2015. "Regulating the financial cycle: An integrated approach with a leverage ratio," Economics Letters, Elsevier, vol. 136(C), pages 70-72.
    17. Daniel Gros & Cinzia Alcidi & Ansgar Belke & Leonor Coutinho & Alessandro Giovannini, 2014. "State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area," Ruhr Economic Papers 0482, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    18. Eloísa Ortega & Juan Peñalosa, 2013. "Some Thoughts On The Spanish Economy After Five Years Of Crisis," Occasional Papers 1304, Banco de España;Occasional Papers Homepage.
    19. Esposito, Piero & Messori, Marcello, 2016. "Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU," SEP Working Papers 2016/3, LUISS School of European Political Economy.
    20. Benjamin Schwanebeck, 2017. "Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union," MAGKS Papers on Economics 201741, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    21. Lane, Philip R., 2015. "Macro-Financial Stability under EMU," CEPR Discussion Papers 10776, C.E.P.R. Discussion Papers.
    22. repec:bla:jcmkts:v:55:y:2017:i::p:133-148 is not listed on IDEAS

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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