Financial integration in the euro area has particularly benefited Dutch financial institutions, as the Netherlands has a small domestic market and high domestic savings. However, this interconnectedness can also result in risks to stability, as we are now seeing in the contagion effects from the Greek problems. This calls for an ambitious policy response, including strict fiscal discipline and the prevention of economic imbalances, so as to preserve Europe’s inestimable value for growth and employment. That is in the interest of Europe and therefore of the Netherlands.
Economic and financial interconnectedness
The strong economic interconnectedness of European countries is a natural consequence of the internal market for goods and services. The disappearance of borders boosted trade within Europe, and other European countries became important investment locations. With the introduction of the euro in 1999, intra-European trade and investment have increased again. International payments are no longer subject to exchange rate risks and the price differences across countries have become transparent. The result is that around 60% of foreign investment and almost three-quarters of European countries’ foreign trade now takes place with other European countries. European countries are strongly dependent on each other economically. That is particularly true of the Netherlands: the Dutch economy is twice as open as the average EU country.
The growth in intra-European trade and investment was coupled with an increase in cross-border financial services. This is not a specifically European phenomenon but a global one – at any rate until the outset of the financial crisis. The strongest integration can be seen in securities markets and interbank transactions. Almost 30% of interbank loans in the euro area are cross-border, a development supported by the uniform payment system Target. The integration of equity and bond markets is stimulated by the euro-wide infrastructure for securities settlement. A common monetary policy has also stimulated integration in the euro area, as banks in all Member States face the same money market rates. In comparison with the professional money and capital markets, the consumer market is – as yet – less integrated, owing to national differences in legislation, products and payment methods.
Financial integration is also reflected in euro area banks’ claims on other euro area countries, which total nearly EUR 3.4 trillion (Source: BIS). There is a complex network of financial relations in Europe, allowing problems in a relatively small country such as Greece to spread across the entire European financial sector (and beyond). The figure below presents cross-border claims on – and liabilities towards – banks relative to GDP in 10 selected euro countries. These countries’ banks have on average 37% of national GDP in claims on other euro countries, almost half of which is on other banks. Of the banks’ total claims on other euro area countries, a third is on peripheral countries, the greater part of which to Italy and Spain. The peripheral countries, but also relatively open economies such as Belgium, Austria and the Netherlands, hence also have large liabilities to banks in the euro area. The value of Dutch banks’ claims on the euro area is above average, at 69% of Dutch GDP (24% of which on peripheral countries). By way of illustration: that is more than twice as much as the exposure to the US. And a large share (around 43%) of the foreign investments held by Dutch pension funds, insurers and investment companies are in other euro area countries. This reflects Europe’s tremendous importance for the Dutch financial sector.