Sudden Stops in the Euro Area

Silvia Merler, Jean Pisani-Ferry


The single currency was expected to make national balance of payments irrelevant for euro-area members. From 2010 onwards, however, governments, but also banks and non-financial companies in several euro-area countries have had difficulty getting access to non-resident financing.

Assessing whether there has been a balance-of-payment crisis by looking at the current-account developments is a flawed approach in the case of countries that receive significant official support through assistance programmes or the Eurosystem of central banks. In this paper we document the evolution of private capital flows and formally test for the existence of sudden stops.

We find that Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows that qualify as sudden stops. The timeline suggests contagion effects were present.

We document the substitution of the private capital flows by public flows. In particular, we show that (weak) banks in distressed countries took up a major share of central bank refinancing, thereby contributing to the build-up of intra-Eurosystem net balances.

The evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to systemic reform.


TARGET2, balance-of-payment crisis, capital flows, Euro area

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