Current accounts and financial flows in the euro area

• Published in: Journal of international money and finance Vol. 48; pp. 291 - 313
• Main Authors: Hobza, Alexandr, Zeugner, Stefan
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.11.2014; Elsevier Science Ltd
• Subjects: Capital movement; Current account; Current accounts; Debt management; Eastern Europe; Economic analysis; Economic crisis; Euro area; Eurozone; External imbalances; Financial crisis; Financial instruments; International financial flows; International monetary economics; Studies; Trade deficit; Trade flows; Western Europe; Europe; F41; F32; Current account; International financial flows; F34; F36; External imbalances; Euro area
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2014.05.019

We construct a new database of bilateral financial flows among euro area countries and their major world partners and explore the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area. The data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the 'core' with deficits in the periphery went along financial rather than trade interlinkages. In particular, the data document the dominant role of 'core' countries in financing the euro area periphery's current account deficits before the financial crisis, both directly and through intermediating financial flows from outside of the euro area. Most of this financing took the form of debt instruments. Following the withdrawal of private financing from 'core' countries during the crisis, the ECB-mediated funding and other official flows helped the periphery to refinance its liabilities and smoothen the external adjustment. •We construct a new database of bilateral cross-border financial flows.•We focus on their role for the build-up and wind-down of euro area imbalances.•Euro area surpluses & deficits were linked through financial rather than trade flows.•France played a crucial role for capital flows into the periphery, too.