2. The Capital and Financial Account Imbalances
2.2. Capital and Financial Accounts
The capital account includes two main categories (IMF 1993):
1) capital transfers, which consist of capital repatriation/ expatria-tion and public/private unilateral transfers of capital, such as those from the EU budget;
2) acquisition or disposal of non-produced, nonfinancial assets, i.e., those transactions associated with tangible assets that may be used or are necessary for production of goods and services but are not actually produced (e.g., land), and transactions associat-ed with non-producassociat-ed, intangible assets (e.g., patents, copy-rights, trademarks, franchises).
IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE
These categories are of minor importance in the European setting. In fact, as shown in Table 2.1, net capital account balances have been neg-ligible for the large majority of the countries which belong to the oldest circle of the EMU. In the first stage of the euro (before the beginning of the financial crisis), the only exceptions were the surpluses of Luxem-bourg, the Netherlands, and – for few years – Belgium. Moreover, since 2007 the net capital account surpluses were ranging between 1% and 2% of GDP for Portugal and Greece and reached a deficit of -1.3 % of GDP – but just in 2012 – for Ireland. Among the NMS, Slovakia, Malta and Estonia recorded important inflows. The Baltic state in particular, due to its deep recession during the global financial crisis, received im-portant inflows of capital with a peak of 4.1% of GDP in 2011.
On the other side, the financial account records the amount of net fi-nancial assets (bonds, loans, equities and other debt instruments) that the residents have bought from the rest of the world. By definition, there is a net accumulation of foreign assets (liabilities) when the sum of cur-rent and capital account is in surplus (deficit). The financial account can be written as:1
CA + KA + FA = 0 (10)
Unfortunately, the lack of data does not allow a complete analysis of the positions at country and aggregate level in the pre-euro decade. What is clear is that the overall balance for the euro area had been close to zero since the end of the Nineties to the peak of the European crisis, while it became substantially negative in the last two years here analysed (2012 and 2013) due to the current account surplus and the negligible impact of the capital account of this same area. At the opposite, single countries’
positions show again relevant differences representing the mirror image of their specific current account positions (Table 2.2).
Germany, Luxembourg and the Netherlands showed increasing or very
1 In practice, however, the accounts frequently do not balance due to the bias in the estimates of the different items of the balance of payments derived from heterogeneous sources. In order to equalise the balance of payments, net errors and omissions are in-cluded in the accounts.
2.THE CAPITAL AND FINANCIAL ACCOUNT IMBALANCES
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high deficits in their financial account balances between 1999 and 2007, as a result of loans and the financial investments that these countries car-ried out into southern European markets.2 After severe reductions during the international financial crisis, the deficits in the financial accounts bal-ance of these same countries again to be very high until 2013 (Germany and the Netherlands) or until 2011 (Luxembourg). It must also be noted that, during the international financial crisis, Austria recorded a dramatic increase in the deficits of its financial account balance, which went down since 2010. In addition, as reported by the European Commission (2012a), during the whole period Germany played the role of euro area door for investment flows coming from outside the area.
Southern European countries systematically increased their demand for foreign financial investments in order to finance public and trade deficits, since 1999 to 2007 (Spain) or 2008 (Greece, Ireland, and Por-tugal);3 at the same time, these foreign financial investments were stim-ulated by the lack of devaluation risks and by the downward conver-gence of interest rates after the euro introduction. In the case of Greece, Portugal, and Spain the surpluses in the financial account balances re-mained high but decreasing from 2009 to 2011; in the case of Ireland instead, the dynamics of this balance became more erratic during the same period. In any case, all these peripheral countries turned to deficits their financial account balances in the last two years (Ireland and Por-tugal) or in the last year (Spain and Greece) here analysed.4
For other countries, like Italy and France, surpluses in the financial account balance had been moderate during the first decade of the euro, but in Italy they increased up to 5.5% of GDP during the European crisis, because of both the public debt increase and the higher long-term
2 The capital outflows from North to South Europe also involved the northern banks’
large purchase of government bonds issued by peripheral Member States. This was also a consequence of Basel II regulation. According to the latter, government bonds of in-vestment grade (such as those issued in the euro area) have zero capital requirements (see Abad et al. 2013).
3 It must be noted that Portugal recorded a high surplus already in 1999.
4 In the view of Gros (2012), the expansion in domestic demand financed by the capi-tal inflows mainly explains why southern euro area countries were able to reproduce their lack of competitiveness towards northern countries.
IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE
est rates. Between 2011 and 2013, Italy’s balance fell rapidly below zero as result of the country’s deep recession. At the opposite, France’s bal-ance increased until 3.7% of GDP in 2012 and remained slightly positive in 2013. Finally, Finland started to have surpluses in its financial ac-count balance during the international financial crisis; then, these sur-pluses increased up to 8.8% of GDP at the peak of the European crisis but became negative in the last year here analysed (2013).
The conclusion is that the European crisis determined a dramatic de-crease in the financial transfers from the central to the peripheral Mem-ber States of the EMU. The former did not cancel the significant deficits in their financial accounts, due to the need to compensate their current accounts surpluses towards the rest of the world; the latter had to re-equilibrate their current account balances due to the impossibility to reproduce the previous surpluses in their financial balances. These new unstable equilibria could have had negative effects for structurally cred-itors countries, due to the higher risks which characterised the interna-tional markets with respect to the European internal market; and they certainly had recessionary impacts on the structural debtors countries which have been forced to adjust their current account disequilibria in the short run. These effects have been partially buffered by the TAR-GET2 payment system.5 However, as pointed out by Abad et al. (2012), the shock-absorption function of TARGET2 allows to postpone, but can’t eliminate, the necessity of reforms useful to structurally adjust current account imbalances in the euro area.