Source: European Central Bank (ECB)
Authors: Katrin Forster, Melina Vasardani &Michele Ca’ Zorzi
The global financial crisis that started in 2007 and intensified after the collapse of Lehman Brothers in September 2008 abruptly interrupted the more than two-decade-long process of increasing world financial integration. With the complex web of global interlinkages contributing to the spreading of the turmoil from the United States to the rest of the world, the crisis led to unprecedented declines, or even reversals,
in global cross-border capital flows. Although financial markets have bounced back from their lows, cross-border capital flows have generally remained well below their pre-crisis levels.
The advanced economies, which have traditionally dominated global capital flows and were considered immune from sudden capital withdrawals, were particularly affected. Prior to the crisis, the euro area current account was close to balance, with cross-border financial flows mostly cancelling out when all components are summed. In net terms this indicated that the euro area was neither receiving nor exporting large capital flows, although significant developments were occurring in gross terms. The financial crisis, however, affected not only those countries with large current account deficits but all countries with open capital accounts.
The aim of this paper is to highlight the unprecedented adjustments triggered by the financial crisis in euro area cross-border financial flows.