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

Daniel Gros and Cinzia Alcidi ()

No 492, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

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.

JEL-codes: E20 F32 F36 H60 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (16)

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Journal Article: Country adjustment to a ‘sudden stop’: does the euro make a difference? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0492

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