Financial assets overhang in Europe

Abstract

This work analyses external imbalances across Europe using data on sectorial gross value of assets over sixteen years (1995–2011) in founder countries of the European Union and in the whole euro area. The empirical analysis strongly supports arguments against the thesis that in Europe sovereign debt is the problem and fiscal austerity the solution. On the contrary, it suggests that the current crisis should be analysed in the light of the growing disproportion of the financial sector compared to real sectors of the economy. This study divides the financial assets generated by the domestic financial companies and by the foreign sector into two aggregates: a proxy for financial resources channelled to the real domestic sectors and a proxy for “financial assets overhang” held within the financial and foreign sector. The financial assets overhang, which boosted the relative size of the financial sector across the continent, should be considered as the main source of excess finance to be rigidly constrained.

Key words:

• external imbalances
• excess finance
• crisis
• European Union
• sovereign debt

Notes

¹Luxembourg is excluded because data from Eurostat do not provide sector details.

²Total liabilities of government do not coincide with official measures of government debt. This is defined as the total consolidated gross debt at nominal value at the end of the year in the following categories of government liabilities: currency and deposits, securities other than shares excluding financial derivatives, and loans (Eurostat metadata). Total liabilities also include shares, financial derivatives, insurance reserves, and other accounts.

³Values of net assets can also change because their market price changes, even without any net addition to the existing stock.

⁴For a review of this approach in a historical perspective, see Bezemer (2010).

⁵An unreported alternative proxy excludes the liabilities of GOV to HH and NFC from computation, thereby building a more uniform measure across countries and years. The quantitative difference between these two alternative proxies is negligible.

Additional information

Notes on contributors

Marcello Spanò

Marcello Spanò is assistant professor in the Department of Economics at the University of Insubria, Varese, Italy.