Macroeconomic imbalances in the euro area have typically been explained as resulting from a neo-classical downhill flow of capital, where Southern countries with low capital stock import savings from the North to finance (non-tradable) investment. Such capital flows were predominantly channelled through banks. Yet, existing literature does not provide an account of bank behaviour nor does it explain why Northern banks did not support domestic credit expansion through cross-border activities, which resulted in falling funding gaps and persistently flat net interest margins. Here, it is argued that financial integration impacted bank behavior differently, as a function of starting financial conditions. Banks in capital-exporting countries primarily faced the challenge of retaining savings that were attracted to higher external remunerations, which forced them into increasing the deposit rates. In contrast, banks in capital-importing countries did not encounter funding shortages and were able to lower interest rates on deposits, which further supported dis-saving. While not denying that the monetary union allowed for a perverse compatibility between conflicting growth models, this analysis focuses on the heterogeneous effects of the common financial shock across different national financial systems.
Benedicta Marzinotto is Adjunct Professor at Johns Hopkins University SAIS. She also holds positions at the College of Europe and the University of Udine, and is currently a Jean Monnet Fellow at the Robert Schuman Centre. She obtained her PhD from the LSE, and has since held positions at a broad variety of institutions, including Chatham House, the European Commission, and Bruegel.