The Components of the Financial Account

in-to FDI,⁶ portfolio investment, other investment, net flows of derivatives and changes in the amount of official reserves.

5 TARGET2 (European Automated Real-time Gross settlement Express Trans-fer system) is the real-time interbank payment system of cross-border transTrans-fers throughout the European Union.

6 FDI denotes the foreign direct investments, that is those investments which reach at least the 10% of the shares of a given foreign company.

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The FDI balance, as Table 2.3 shows, was negative until the explosion of the international financial and “real” crises (2008) for the whole euro area as is typical for its position in terms of economic development. This is confirmed by the fact that most of the EMU countries recorded nega-tive balances, denoting that they invested more abroad than other coun-tries invested in their economies. This pattern was widespread in the group of twelve original euro countries (Greece included), with the par-tial exception of Portugal, Greece, Finland, and Belgium. Among the main countries, France had deficits which reached the peaks of -5.5%

and -3.2% (in 1999 and 2008, respectively) and Germany’s correspond-ent peaks have been of -2.5% and -2.7% (in 1999 and 2007, respectively). Similar values were recorded by Italy in 2007 and 2008 (2.5% and -3.4%, respectively); however it must be noted that, differently from France and Germany, Italy was typically characterized by a poor attrac-tiveness of direct investment from abroad. Smaller countries (such as the Netherlands and Ireland) followed more erratic paths, whereas Lux-embourg recorded the highest deficits (with a peak of -146% in 2007) due to its financial power.

The FDI balance of the euro area reduced dramatically its deficits af-ter 2008, and reached the equilibrium in 2012 and 2013. This was cer-tainly due to the entry of the NMS which are highly dependent on FDI, and hence recorded structural and significant surpluses (with the par-tial exception of Slovenia). In particular, FDI’s surpluses represented the major component of the financial account balance for Cyprus and Malta.

However, in the last five years even the large majority of the older Member States of the euro area either recorded surpluses or reduced their deficits. Luxembourg, Belgium, Ireland and Portugal had surpluses in four out of five years. The low rate of corporation tax played a key role for Luxembourg and Ireland: the FDI balance surpluses of the for-mer reached peaks just below 74% in 2012 and above 66% in 2011, those of the latter reached a peak of 10.9% in 2011. Similarly, Belgium showed two peaks above 11% in 2010 and 2011 while Portugal record-ed a peak of 4.4% in 2010. Greece and Spain reportrecord-ed slight surpluses after the peak of the international crisis and again during the last two years. France, which kept important deficits since 2009 to 2012, record-ed a surplus in 2013 (0.3%). Finally, Germany and Italy rrecord-educrecord-ed their

IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE

deficits (respectively to -0.8% and -0.7% in 2013). The other euro area countries, which recorded systematic deficits in the FDI balance during the last five years, were Austria and Finland.

These trends confirm that the European peripheral Member States were unable to attract a sufficient net positive amount of FDI from the rest of the euro area when they had growth rates above the average and would have had to implement a catching up process in terms of struc-tural competitiveness. At the opposite, they started to have positive FDI’s balances when they had to face a deep financial and “real” crisis and their economies were in recession.

The portfolio investment balance includes those foreign investments in equity, which are below the 10% of the shares of a given foreign com-pany and thus cannot be classified as direct investments (see Table 2.6), as well as foreign investments in debt securities. In the euro area this balance has recorded systematic surpluses with the exception of 2001 (Table 2.4). In particular, in this area net inflows reached a peak at the start (3.8% in 1999) and approximated this peak during the worst phase of the European crises (3.4% in 2011) and during the interna-tional crisis (2.7% in 2008 and 2009). Then, in the two most recent years these surpluses have fallen almost to zero. In order to better in-terpret this dynamics, it is necessary to refer to the specific countries.

Leaving aside the year 2009, Luxembourg represented the main Eu-ropean attractor of portfolio investments; this was largely due to its fis-cal incentives. Also France, Greece and Portugal obtained surpluses in their portfolio investment balances for various years; however, France recorded deficits in the first period of the euro life (from 1999 to 2005), whereas Greece’s and Portugal’s positive balances were affected by the sudden reversion of net flows after 2010. The Greek and Portuguese evolution, which was partially followed also by Spain (2011 and 2012) and Italy (2010 and 2011), was probably due to the sovereign debt problem and the related speculative attacks against all southern Euro-pean countries. The other traditional peripheral country (that is Ire-land) paid instead for the bursting of the ICT bubble and of the begin-ning of the international crisis. However it remains true that, after hav-ing recorded important surpluses in its portfolio investment balances between 2009 and 2011 (with a peak of more than 54% in 2010),

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land suffered deficits in the last two years here analysed. Finally, the po-sition of NMS was mainly affected by the troubles of Cyprus (2008-2010) and Malta (2009-today), while the portfolio investment net bal-ances of Slovakia were not so high (but for the important surpluses in the last two years) and those of Slovenia were largely positive (with peaks of 13.1% and 10% in 2009 and 2013, respectively).

Other investments include trade credits, loans, currency transfers and deposits, loans from the IMF, and so on. Table 2.5 displays that, at the starting of the euro area (in 1999), the European countries showed small imbalances with respect to these instruments, with the only ex-ceptions of Portugal, Austria and Spain which were characterised by significant surpluses. In the following years, Spain increased its surplus in other investment balances until 2008 (with a peak of almost 10%) and kept an important positive balance also in 2011, but recorded a high deficit in 2013 (-8.7%). Portugal too recorded continuous surpluses un-til 2012 and switched to a negative balance in the last year here ana-lysed. However, its trend was less regular than that of Spain: Portugal reached a peak in 2010 (10.5%), kept high surpluses in the following two years, and recorded a small deficit in 2013. The other countries with systematic prevailing surpluses in the other investment balances during the first fourteen years of the new century were Greece, Finland, Slovakia, Malta, Italy, and partially Cyprus. In particular, Malta has had regular and important surpluses since 2009; Finland, and especially Greece, recorded recurrent surpluses since 2005, with peaks of almost 20% (in 2010 and 2011) and of 56.9% (in 2012) in the Greek case. Slo-vakia too recorded continuous surpluses even before its entry in the eu-ro area; however, it recorded significant deficits in the last two years.

Italy recorded modest surpluses, with three peaks (4.3% in 2007, 9.7%

in 2010, and 5.3% in 2011), and a small deficit in 2013. Finally, Cyprus recorded two huge surpluses in 2008 and 2009 (just below 100%) but also important and growing deficits in the last three years.

At the opposite, in the new century Luxembourg recorded huge defi-cits in its balances of other investments (often around -200% and with a peak of -500% in 2012), but during the international financial and “real”

crises (2008 and 2009), as usual, these negative imbalances were main-ly due to the competitive fiscal conditions offered by this country. Even

IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE

if with largely smaller percentages than Luxembourg, Germany too rec-orded systematic deficits in its balances of other investments and, with the exceptions of two years, the same applied to Austria and the Nether-lands. France and Belgium followed more erratic paths with a preva-lence of years with deficit balances. The main variance was recorded by the Irish balances with peaks of both deficit (2010) and surplus (2008) around 50%.

Despite the just examined different trends which characterized its various Member States, the euro area as a whole had a balanced position until 2010 while it recorded significant deficits in the last three years. As pointed out by some authors (Schmitz and von Hagen 2011, Schnabl and Freitag 2012), the rough compensation of imbalances at the European level could be the result of higher financial integration among Member States after the introduction of euro, with a consequent increase in the level of cross-border banking loans. From this point of view, it is inter-esting to recall that Germany, Luxembourg and other “central” countries were systematic net lenders while inflows exceeded outflows in the large majority of the peripheral countries, in particular with the out-break of the international financial crisis. Then, the credit crunch and the reduced propensity to invest, implied by the explosion of the debt crisis and of the banking crisis – first – in Greece, Ireland and Portugal and – then – in Spain and Italy, led to a segmentation of the European financial markets with dissimilar impacts at country level. Due to the different problems of the national banking systems and to the fact that other investments include transactions in some government assets, the imbalances of the single peripheral countries and of other European countries in difficulties were affected by the specificities in the restruc-turing of public finances and of financial systems.

Before analysing the two remaining components of the financial ac-counts (that is, the net flows of derivatives and the variation of official reserves) which do not have a significant aggregate impact, it is conven-ient to offer a general comment on the empirical evidence collected until now. Both portfolio and other investments seem to confirm the view that the majority of the EMU “central” countries, and in particular Ger-many and Luxembourg, have been the main financers of public and pri-vate debt of the EMU peripheral countries until the recent years. This

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role of financers have been facilitated by the fact that Germany, France and Luxembourg played also the role of intermediating capital inflows from non-euro area countries (European Commission 2012a).

Let us now turn to the two remaining components of the financial ac-counts. Net flows of derivatives (Table 2.6) as well as changes in official reserves (Table 2.7) are negligible for almost all European countries. As far as derivatives are concerned, the only systematic exception is repre-sented by Luxembourg which recorded recurrent and important posi-tive imbalances and a few years of high deficits.⁷ Erratic negative imbal-ances also affected Germany (-3.5% in 2007), Cyprus (-4.9% and -3.8%

in 2012 and 2008, respectively) and the Netherlands (-2.8% and -2 in 2008 and 2010, respectively), whereas erratic positive imbalances af-fected France (2.2% in 2007) and again the Netherlands (3.5% and 2.3% in 2008 and 2013, respectively) and Cyprus (3.1% in 2009). For what concerns official reserves, there were just significant positive vari-ations in Spain and Greece at their entry into the euro area, and im-portant negative variations in most of the NMS before their entry into the euro area. In any case, all these imbalances were not so significant to change the impact in the European trends of the financial accounts.