There are two stories regarding capital flows and the eurozone: flows between member states, and flows to and from the eurozone as a whole.
We’ll ignore the flows into Germany and away from Italy for a moment. Although only for a moment, because the intra-euro capital flows actually appear in the capital flows to and from the eurozone, if only indirectly.
So it is worth noting new capital flow data from March, which worsened considerably, via a missive from Nomura analysts on Wednesday:
Portfolio investments saw a net outflow of €35bn (compared with February net inflows of €19bn). As for inflows into the eurozone, demand for debt instruments was weak (€2bn), while eurozone equities saw better demand (€22bn), probably helped by relatively strong risk sentiment in March. Perhaps more interestingly, the main reason behind the negative overall portfolio flows was the activity of eurozone investors, who bought €60bn of foreign assets, mainly bonds and money market instruments. This is the largest foreign investments in almost 1.5 years.
Not good news — and Nomura reckons there’s no reason to suppose this trend will reverse anytime soon. But let’s move on now to the subject of balance of payments accounting, courtesy of SocGen:
In balance of payments accounting, in the absence of fx intervention, any decline (increase) in net inflows of direct and portfolio investment must be offset by an improvement (deterioration) in the current account balance or by a decline (increase) in borrowing from the rest of the world. It follows that a significant deterioration in direct and portfolio inflows either requires a marked contraction in domestic demand (i.e. an improvement in the current-account balance via a fall in imports) or a currency devaluation (allowing an improvement in the current-account balance via a rise in exports and a fall in imports)
So the eurozone, as a whole, has few easy options if net outflows of capital continue: less borrowing, less imports, more exports, or a depreciating currency.
However, we all know that the real “flight” that is happening here is the flight from the periphery, and not from the core. So pan-eurozone metrics like these offer us an inadequate picture of a two-tier economy.
Instead, to get a look at the real flight of capital, it might be worth cautiously revisiting TARGET2, as it offers a view into the flow of capital inside the eurozone (charts via JP Morgan):
The picture is suddenly very clear indeed.