In the last couple of decades, the dynamics of the external balance sheet of the region, examined through the net international investment position, pointed towards a process of significant widening of the negative gap, in the run up to the global financial crisis. Although, this trend to some extent slowed, IIP reached its peak in 2012 and with the beginning of 2013 taper tantrum episode started to reverse. Despite the reversal, on average it is still above the some of the benchmarks, such as the norm of the EC within the macroeconomic imbalances procedure, that equals -35% of GDP. 12  Chart 9 Net International Investment Position  Source: IMF BOP data. In order to have the complete picture, more granular view is important, as it can reveal whether the pre-crisis mode of the rising financial exposure elevated the external vulnerability of the region, and hence whether the adjustment which followed was more abrupt and costly in economic terms. For instance, the larger weight of direct investment (including the intercompany lending) should in principle improve the external risk profile of the country, as the probability for sudden reversal is low, and in general it does not yield future financing requirements for repayment of the obligations due. This is not the case with portfolio investments, or the other investments, as debt creating flows, where the risk is higher, both in terms of sudden reversals and rising future payment burden.

Higher-than-warranted balances remained centered in the euro area as a whole (driven by Germany and the Netherlands) and in other advanced economies (Korea, Singapore), while lower-than-warranted balances remained concentrated in the United Kingdom, the United States, and some emerging market economies (Argentina, Indonesia). China’s external position was assessed to be in line with fundamentals and desirable policies, as its current account surplus narrowed further, although achieving a lasting external rebalancing will require gradual reining in expansionary macroeconomic policies and adopting further structural reforms. The mirror image of the current account balances, are the financial flows. After the crisis, global map of financial flows changed, mostly due to the shift in the global financial conditions and relative growth differentials between emerging and advanced economies. Following quantitative easing programs in advanced economies in the aftermath of the global financial crisis, portfolio and other investment capital flows to emerging market and developing economies intensified, which, together with accommodative macroeconomic policies, contributed to currency appreciation pressures and larger current account deficits. These trends, however, 5  started to reverse beginning with the 2013 taper tantrum episode as growth differentials between advanced and emerging market economies narrowed and the prospects of monetary policy normalization in advanced economies gathered strength. Direct investment remained relatively stable and less sensitive to changes in global financial conditions and US dollar movements. Despite the narrowing of global current account imbalances, stock imbalances have continued to widen to reach record levels.