EN Official Journal of the European Union CE 65/99

(2004/C 65 E/112)

WRITTEN QUESTION E-1880/03

by Christopher Huhne (ELDR) to the Commission

(6 June 2003)

Subject: Capital flows between euro-area countries

Further to the answer to question E-1134/01 (1), will the Commission examine the scale of gross capital flows (not net capital flows) between the euro-area countries since the launch of the euro, compared with the periods before, and state whether there has been an increase in the scale of such flows and if so by how much?

Answer given by Mr Solbes Mira on behalf of the Commission

(14 July 2003)

Increases in cross-border capital flows can provide a positive contribution to economic growth and efficiency increases. The introduction of the single currency has not only removed exchange rate risks for capital flows within the euro area, but also stimulated the creation of a common capital market in the euro area. Both effects have facilitated cross-border capital flows within the euro area and it can therefore be presumed that the euro has positively influenced the volume of capital flows. However, at the same time a number of other determinants matter for capital flows and it appears very difficult, if not impossible, to single out the impact of the euro on capital flows by analysing capital flow time series. For instance, the successful convergence of long-term interest rates in euro area economies has reduced incentives for investors to diversify across government bonds issued by different euro area economies (at the end of 2002 the yield spreads between German ten-year government bonds and similar assets in other euro area economies had declined to less than 20 base points).

Another difficulty arises from the rather unsatisfactory data availability. There is no single database that provides complete and timely information for all participating economies. Observations stem mostly from foreign direct investment (FDI) data, which are received and published by Eurostat and from balance of payments data, in particular capital accounts, published by national institutions (e.g. national central banks).

Foreign direct investment data are available for most euro area countries up to year 2001 from Eurostat's NewCronos database, but for some countries only equity and ‘other capital’ (loans between the mother company and the affiliates) investment data is available (i.e. reinvested earnings are not available for some Member State). The comparisons below refer to equity capital foreign direct investment flows. It has to be noted that at the level of the Member States the strong impact of single transactions (e.g. telecom mergers and acquisitions across borders in 2000) means a certain obstacle to any interpretation of these data. If one nevertheless compares equity FDI flows between single Member States and the rest of the euro area, some differences between the pre-euro area and the euro area years become visible.

The qualitative changes between the three last years in Stage II (1996-1998) and the first three years of Stage III (1999-2001) could indicate a certain increase in the amount of capital flows. In all reporting countries the amount of foreign direct investment abroad (i.e. in other euro area economies) has gone up, whereas in all countries except the Netherlands and Finland also the received direct investment originating from other euro area economies has increased. A less clear picture is provided by comparisons between single years.

Changes in FDI flows within the euro area (1996-2001) (2)

FDI abroad, equity capital (in other euro area economies) FDI in the country, equity capital (originating from the euro area) 1999-2001 against 1996-1998 2001 against 1996 2001 against 2000 1999-2001 against 1996-1998 2001 against 1996 2001 against 2000 B-L + + — + + + D + . . + + — GR . + . . + E + + — + + + F + + + + + — IRL (3) + . + + . — I (4) + + + + + + NL + — — — — — A + — — + — — P + + + + + — FI + + — — — +

The increases in equity capital flows among euro area economies in the three-year periods before and after the introduction of the single currency have to be seen against the background of a strongly increasing mergers and acquisitions (M & A) activity in the world economy in the years 1999 and 2000 as for instance documented in the annual Direct Investment Reports by the United Nations Conference on Trade and Development (Unctad). It could be premature to link the increase in capital flows in 1999 and 2000 to the effects of the introduction of the single currency. Similar caveats apply to the interpretation of data of the sharp decline in world foreign direct investment in 2001 (more than 50 %; all data in brackets according to Unctad) and 2002 (about 27 %) has to be taken into account. The decline in foreign direct investment in the euro area in 2002 (- 16 %) has been much smaller than for instance in the United States (US) economy (- 75 %) and in the United Kingdom (- 67 %), but it appears difficult to link this difference to the single currency as other determinants (e.g. accounting scandals in the US) have contributed as well.

As regards capital accounts there is anecdotal evidence about the difference between developments between euro area Member States on the one hand and between single Member States and the rest of the world on the other hand:

— For Germany the Bundesbank regularly reports about origins and destinations of German capital flows (e.g. Bundesbank, International Capital Links, May 2002) and it provides long series in a publicly accessible online database. According to Bundesbank data capital exports (volumes) from Germany to the rest of the euro area more than doubled in 2002 (from EUR 72 billion in 2001 to EUR 160 billion in 2002), while the total amount of German capital exports to all countries declined in 2002 (from EUR 282 billion in 2001 to EUR 256 billion in 2002). However, year-on-year increases can be severely affected by large single transactions suggesting to perform also comparisons on the basis of multi-year periods. Capital outflows to euro area countries from 1999 to 2002 (annual average of EUR 65 billion) have also more than doubled as compared to those from 1995 to 1998 (annual average of EUR 142 billion). The development of capital inflows from other euro area economies displays a different pattern (no increase at all) and also a closer look to the components (substantial changes in relative importance of direct and portfolio investment over the years) suggests to be cautious in interpreting data.

— For the Netherlands the Dutch central bank publishes data on regional components of direct investment flows. As regards direct investment the inflows from euro area economies have been higher in each of the first euro area years than in any other year before 1999. In terms of four-year averages inflows have increased from EUR 5,2 billion (1995-1998) to EUR 19,3 billion (1999-2003). In the same period the average share of foreign direct investment from euro area economies in total inflows has increased from 39 % to 43 %. A similar increase is registered in terms of Dutch foreign direct investment in other euro area economies. The levels of outflows recorded in all euro area years have never been seen before. The annual average outflow increased from EUR 8 billion (1995-1998) to EUR 24 billion (1999-2002), while the share of direct investment outflows to euro area economies in total Dutch outflows increased from 35 % (1995-98) to 44 % (1999-2002).

(1) OJ C 261 E, 18.9.2001, p. 228.

(2) Comparison are based on period averages where needed. In case of a missing data point the available data have been used for calculations.

(3) Total direct investment.

(4) Equity capital and other capital.