Stefano Borgioli, Carl-Wolfram Horn, Urszula Kochanska, Philippe Molitor, Francesco Paolo Mongelli, Eva Mulder, Alessandro Zito, 03 December 2020

The COVID-19 shock is unprecedented in terms of the scale and speed of its effects. This column provides an overview of financial fragmentation in the euro area during the crisis through the lens of a novel high-frequency composite indicator. It reveals that after an initial sharp deterioration, euro area financial integration broadly recovered to pre-crisis levels by mid-September, thanks to unprecedented fiscal, monetary and prudential policy responses.

Andreas Fischer, Henrike Leonie Groeger, Philip Sauré, Pınar Yeşin, 09 December 2019

Global imbalances are at the core of today’s trade tensions, but official current account statistics may not be sufficient to assess the external positions of financially integrated economies. For instance, balance of payments accounting standards do not prescribe the recording of retained earnings on portfolio equity investment in the current account. This column argues that adjustments in income flows in equity investment therefore remain concealed in official current account statistics. In today’s financially integrated world with existing accounting standards, external adjustment mechanisms should be considered more broadly than just as an evolution of trade balance and exchange rate movements. 

Sebnem Kalemli-Ozcan, 02 December 2019

Sebnem Kalemli-Özcan explains how financial integration, an important part of ongoing globalisation processes, leads to efficient allocation of capital and promotes investment and growth.

Hélène Rey, 11 February 2019

Hélène Rey of London Business School argues that the free movement of money around the world brings benefits but also costs, in an interview recorded at the Royal Economic Society conference in 2014.

Jan Stráský, Guillaume Claveres, 28 January 2019

Calls to complement national automatic stabilisers and the ongoing financial integration in the euro area with a common fiscal instrument have provoked a mixed response. This column, part of the VoxEU debate on euro area reform, uses a dynamic stochastic general equilibrium model of the euro area to show that fiscal risk sharing brings an additional layer of stabilisation compared to national stabilisers, particularly when monetary policy is constrained by the effective lower bound. It also argues that an unemployment reinsurance scheme could be designed in such a way that it would benefit all members of the currency area and would not lead to permanent transfers among countries.

Jean-Pierre Landau, 24 November 2016

The objectives of maximising growth and reducing external imbalances may not be fully compatible in a financially integrated and asymmetric world. This column argues that countries have two choices: they can contain global imbalances and gross financial flows through permanent capital controls, or they can pursue financial integration, managing growing imbalances and external exposures by creating more global safe assets. This implies debt contracts would be either state-contingent, with easy restructuring, or built to be ‘safe’, with a high level of commitment by the issuer.

Céline Allard, John Bluedorn, 22 April 2016

The turbulence experienced by the Eurozone in 2010-12 highlighted the shortcomings of the currency union. This column suggests that the crisis was exacerbated by a combination of a lack of market adjustment mechanisms, rapid financial integration, and underlying design issues. While substantial progress has been made to address some architectural issues, minimal elements of a fiscal union are still needed in our view to increase the union’s resilience to shocks and to prevent the re-emergence of broader economic and financial stress.

Sebnem Kalemli-Ozcan, 12 February 2016

The ongoing Eurozone Crisis has raised many debates on what needs to be done to reduce the frequency and severity of similar future crises. This column discusses the implications of equity versus debt flows in terms of risk sharing during the Crisis, and in terms of slow recovery in the aftermath of the Crisis. The author suggests that to induce a fast recovery in an aftermath of a crisis, the EZ needs a banking union and a broader financial union based on equity ownership. 

Vincent Bouvatier, Anne-Laure Delatte, 14 December 2014

Eurozone financial integration is reversing, with 2013 cross-border capital flows at 40% of their 2007 level. This column discusses research showing that banking integration has in fact strengthened in the rest of the world.

Sebnem Kalemli-Ozcan, Bent Sørensen, 23 May 2012

News reports today are full of negative stories on the Eurozone. This column presents evidence of a much-overlooked benefit. The common currency has led to increased financial integration and in turn increased risk sharing, which helps to significantly reduce output shocks. Those arguing for a break up of the Eurozone should take note.

Joshua Aizenman, Yothin Jinjarak, Donghyun Park, 28 October 2011

The relationship between financial openness and economic growth remains the subject of heated controversy. This column examines the links between economic growth and FDI, portfolio investment, equity investment, and short-term debt in the last 20 years. It finds a large and robust relationship between growth and FDI but not with other types of financial flows.

Olivier Jeanne, Patrick Bolton, 25 April 2011

The Eurozone crisis has thrown into relief the dangers of financial contagion. The authors of CEPR DP8358 analyze the causes and consequences of sovereign debt crises in zones with financial integration. They conclude that without fiscal integration, the supply of government debt in these areas reaches an inefficient equilibrium, with safer governments inefficiently issuing too little of their high-quality debt and riskier governments issuing too much.

Elias Papaioannou, Sebnem Kalemli-Ozcan, José-Luis Peydró, 20 June 2009

What was the payoff to adopting the euro? This column says that financial integration, measured as bilateral bank holdings and transactions, increased by 40% more amongst eurozone members than countries that stayed out. It attributes that growth to the euro’s introduction eliminating exchange rate risk and coinciding with financial regulatory harmonisation.

Luigi Zingales, 28 January 2009

In 1933, US securities regulations were introduced to restore trust in financial markets. Today, a new regulatory focus is needed to address the crisis of confidence. After reviewing the status of financial regulation, this column sketches policy proposals in three key areas of securities markets.

Joshua Aizenman, Menzie Chinn, Hiro Ito, 09 January 2009

Is the trinity impossible? This column traces the evolution of the three aspects of the trilemma – exchange rate stability, monetary independence, and financial integration – across countries over the last four decades. A rise in one trilemma variable does result in a drop of a linear weighted sum of the other two.

Fabrizio Coricelli, 18 July 2008

Financial development is key to an economy’s long-run growth. This column argues that it is asymmetrically important – while not key to economic expansion, financial development is a critical shock absorber that helps prevent sharp economic contractions. Moreover, avoiding such drops improves long-run growth prospects.

Philippe Martin, Nicolas Coeurdacier, 19 October 2007

Common sense suggests that the euro should have stimulated trade in financial assets among Eurozone nations. Empirical research confirms this, but finds a much larger effect in bonds than equities. Also, euro ‘outsiders’ seem to benefit from lower transaction costs to diversify risk when purchasing euro assets, but the gain is around half what the insiders get and with a potential diversion effect that penalises firms which want to raise capital on international markets.


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