Capital flight in the Eurozone

In a fascinating research note*, Matt King of Citigroup calculates the outflows of capital from various euro zone nations, in particular Italy and Spain. He concludes that Italy saw 160 billion euros exit in 2011, while Spain lost 100 billion euros, in a mixture of bank withdrawals and sales of government and corporate bonds. He thinks a further 200 billion euros could follow.

…Foreign bank deposits have fallen 64% in Greece, 55% in Ireland and 37% in Portugal; in Italy, the fall is 34% and Spain 13%. Foreign government bond holdings have dropped 56% in Greece, 18% in Ireland and 25% in Portugal; in Italy the fall is 12% and Spain 18%. So if Italy and Spain were to move to the average for the other three, a further 200 billion euros would flow out.

A final thought. This is another example of the nationalisation of markets, in which official flows are steadily replacing private sector capital. It is a trend that seems unstoppable.

Here is a bit more.


The euro is leaving the periphery before the periphery leaves the euro.

Clearly this means that government needs to be borrowing and spending much more than it already is.

You say that as a joke, but PK is writing the column right this minute.

PK's in a bit of a bind, I think -- will he endorse the Greek insolvency movement? He would then own the devastation that will follow.

I bet you never see a PK column that acknowledges that Greece got into this mess by increasing spending 10% a year for several years. He's still inexplicably calling this "a crisis that has both provided overwhelming evidence for Keynesian views of fiscal policy" on the basis of two-year charts showing little more than an accounting identity even as Euroland collapses under the weight of excess gov't spending.

TallDave please apply the full coin of your fertile mind to this Scott Sumner blog post and fire back with your riposte / repost:

Sumner makes good points for a pro-Keynesian reason for this Great Recession non-recovery.

Sumner seems to spend a lot of time reiterating the fact that Greece is only 2% of the EU, while ignoring Portugal, Italy and Spain. The markets aren't worried about just Greece. They are worried about a market collapse that will cascade into much bigger and already weak markets.

Dave is writing about Greece, Sumner is writing about the EU. Different problems.

I think he makes a great point about Greece being 2% of the EU, but ultimately overplays it. Lousiana is less than 2% of the U.S. economy but Katrina was still considered a national catastrophe, and I think we would miss Indiana or Maryland (also around 2%) if they were hit by an asteroid. The Greek contagion effect is real, but is a reaction to the policy failure and the resulting altered expectation for the rest of the PIIGS, much more so than a thing to be avoided for its own sake.

I've said before that the basic problem is that we're less wealthy -- and by extension, were less productive -- than we thought we were. As a result, AD was too high for the true (or post-bubble, if you like) value of our production.

I think Scott is correct in saying a large proportion of our problems now are from follow-on effects from the housing collapse, rather than the collapse itself, but that doesn't really change the fact that what we were doing was unsustainable -- we need those desired AD levels to happen with healthier equilibria, and there's no simple or easy way to get there. And as Tyler said, wise fiscal policy could have a place in smoothing things here, except of course our fiscal policy (both parties) has been to spend more in the good times rather than less, so now we're already running gigantic deficits and so our fiscal options are very limited.

On the monetary side, I've gotten more skeptical of NGDP targeting over the past couple years, esp. in terms of implementation, though I still think it's a vastly superior idea to the fiscal alternative (misallocation, incentives matter, real growth should come from productivity gains, etc.). Probably the worst possible thing we could do is grow gov't by 10% a year on low interest loans like Greece did -- the long run can unexpectedly show up in the short term, and then you're all dead a lot sooner than you planned.

Of course it's AD. Demand was inflated with the ability to borrow. Now the ability to borrow isn't there, AD collapses.

This is the Keynesian end point where there are no levers to apply because they all have been applied already.

We will see a flood of cash into Europe this week from the ECB and indirectly the Fed. It may buy a bit more time, but we have been through this before. When was the last flood of cash unleashed into the European banking system? 6 months ago maybe? Nothing got better, it could be argued that each time the crisis becomes more dangerous. The time bought will be shorter and at higher cost.

The 'solution' is default on vast amounts of debt. That will create a cascading crisis throughout Europe as all the banks face extinction. That will engender more bank runs, more political turnovers and upheaval. Demographics are helpful; old people aren't revolutionary. Those in power lose it, institutions will disappear.

The fools shouldn't have borrowed and lent so much money. Doesn't anyone know that debt is unstable and fragile?

When countries have fixed exchange rates and adhere to them, do we describe that as "nationalization of markets"? Because that's what's happening here.

I know, I know, the free-banking types describe all monetary policy as "nationalization of markets". If you want to go there, fine. But if you don't think that the Fed targeting inflation is a "nationalization of markets", then why would exchange-rate targeting be it? And if exchange-rate targeting isn't "nationalization of markets", why is this?

I'm planning a trip to Europe in June. Does this mean the dollar will be stronger? :-)

If you wait till December, you should be able to buy most of the former republic of Greece with whatever's in your wallet. Of course, you'll immediately be lynched as an evil capitalist, but that's life in Krugmanistan.

Reading my Chretein autobiography Bible: the Western nations in 1998 had a meeting about how to spend surpluses. Figured 1/2 tax cuts and debt payback, and 1/2 new social programmes. The Italian had a communist PM. He thought our Liberals were RW, even though B.Clinton knew they were to the left of Democrats. Massimo didn't invite Canada to the meeting....B.Clinton said if Canada wasn't at the next (G8 I think) meeting, neither would be USA. Post crisis Canada the best and commie Italy the worst in G8. Don't help EU countries that elect communists. It seems like all they do is nail hot women/girls.

I'm well to the right of the Liberals in Canada, but I have nothing but praise for Paul Martin's work as finance minister (and to the extent Chretien bade him do it, chapeau).

Without endorsing it, the Keynseian interpretation is surely that Canada has been Keynsian in both the boom and the bust, and here we are. Austro-austerians like myself might argue that the core virtue is never over-spending your means, but we are a dismal bunch and nobody likes us.

What I don't understand is the ramifications for de-Euroization plans. Whose money is currently deposited in Greek banks? And if savvy Greeks have already moved their money out of the country, does that mean the landing is softer, but the losses have been socialized into the whole Eurozone? A small problem if only Greece defaults, but a big problem if Italy tries the same game?

Does a Greek default cause the Eurozone to defensively kick Italy and Spain out before they pull the same trick?

They probably can't, Spain and Italy are just too big. I think they'll be forced to print money instead, in exchange for spending cuts.

Greece appears to be headed out.

I'd like to see the numbers for the US. I would think the inflows of capital to the US during the same period are much larger than the outflows from Europe mentioned in the post, since capital has also been fleeting EM countries such as Mexico as investors keep losing their appetite for risk.

In other words, people are fleeing the Euro into the Euro. What this does is create an imbalance between assets and liabilities in the banking system. All the good assets are flowing to the ECB as security for its central bank credit facility. Significant portions of liabilities are moving from Greece, Spain, Italy to where? Germany, France?

Switzerland had to create capital controls to prevent Swiss banks ending up with too many liabilities in proportion to assets (banks accepting deposits increasing liabilities without creating loans as offsetting assets would need the Swiss central bank to bring balance by changing exchange rates/inflation rates, obviously not acceptable. The US, on the other hand, has taken the inflows of deposits as an opportunity for banks to massively increase its asset holdings, mostly by inflating the prices of the assets resulting in real estate and stock market bubbles.

In the Eurozone, all transactions take place in Euros just as the dollar is used in the US. While depositors historically were pulled out of banks in various States, causing bank failures and depressions, even when States provided deposit insurance. No one in the US suggested the solution was for the depressed State to pull out of the dollar zone by dictating all bank deposits in dollars be converted to the Utah or the Ohio, so the State could resolve the credit problem by printing more Utahs or Ohios to pay for government spending and provide bank liquidity.

What the Eurozone needs is something more like the New Deal banking reform where it becomes clear to all that everyone depends on all banks being sound, no matter the fiscal problems with the local government. While many argue California is like Greece, no one is saying you better pull your dollars out of California banks before they get converted by Gov Brown into the Californian.

"... no one is saying you better pull your dollars out of California banks before they get converted by Gov Brown into the Californian."

Don't you remember when California was paying its debts in script? An active discount market evolved, and it wasn't pretty.

To me the most interesting part of Amity Shlaes' Depression book was the hundreds of local scrips that emerged in the absence of cash. Now that's a liquidity crisis!

The possibility must be faced that people producing in and for the world economy would be better off holding and using a common commodity currency (goods to be priced in weights of ....) and doing without the ''benefits'' of national monetary and debt funded national fiscal policies.

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