Sudden stops in the Eurozone

by Silvia Merler and Jean Pisani-Ferry

Vox
April 2, 2012

Many analysts and observers have put forward that the euro crisis is a balance-of-payments crisis at least as much as a fiscal crisis. This column provides evidence of capital-flow reversals in Greece, Ireland, Portugal, Spain, and Italy. It argues that the fostering of a pan-European banking industry and the creation of a banking union with centralised supervision and access to resources to recapitalise weak financial institutions should feature high on the policy agenda.

Many analysts and observers have put forward that the euro crisis is a balance-of-payments crisis at least as much as a fiscal crisis (e.g. Carney 2012, Giavazzi and Spaventa 2011, Sinn 2012, Wolf 2011). The issue has gained further relevance with the widening of imbalances among EZ central banks within the Target2 settlement system and has important implications for both the short- and the long-term policy responses (Bornhorst and Mody 2012).

The prevailing view over the first ten years of the Eurozone’s life was that balance of payments would become as irrelevant in the monetary union as it is among regions within a country. Indeed current account adjustments after the crisis have been considerably slower in EZ countries like Greece, Portugal, and Spain than in non-EZ countries like Bulgaria, Latvia, and Estonia.

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