This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no The views expressed during the execution of the FESSUD project, in whatever form and or by whatever medium, are the sole responsibility of the authors.The European Union is not liable for any use that may be made of the information contained therein. Financialisation and financial balance sheets of economic sectors in the Eurozone Jesús Ferreiro and Carmen Gómez (University of the Basque Country UPV/EHU) Conference “Financial Liberalisation: Past, Present and Future” St. Catharine’s College, Cambridge, March 31, 2016

1. Introduction Last decades have witnessed fast growth of financial sectors and activities in developed and emerging economies. This process is labelled as ”financialisation”. This concept encompasses both the larger size of financial sector and the rising relevance of finances on the economic decisions made by non-financial agents: “financialisation means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies” (Epstein, 2005, p. 3).

. The main elements that define financialisation are: The rising size of financial activities The larger size of indebtedness-leveraging of private agents (households, non-financial corporations and financial corporations) The larger relevance of financial variables in the resource allocation processes of non-financial private agents Even though financialisation is a common process to developed and emerging economies, it is frequently argued that this is a variegated process, with significant differences among countries, depending on the level of development and the institutional, social and political frameworks

. This paper focus the analysis on euro economies (countries with similar level of development and institutional-political frameworks), allowing to test the existence of a variegated financialisaton process in the Eurozone. With this aim, we will analyse the financial balance sheets of the euro countries and the main items of these balance sheets (assets, liabilities and net financial assets). We will make this analysis for the total economy and the different sectors: financial corporations, non-financial corporations, households, general government and rest of the world.

2. Does exist a variegated financialisation process in the Eurozone? Objective: analyze the differences in the sizes of the national financial balance sheets of Euro countries and the evolution of these differences Items analysed: size (% of the GDP) of financial assets, financial liabilities and net financial assets Sectors: total economy, non-financial corporations, financial corporations, households, general government, rest of the world Period: 1999 to 2014 Source: Eurostat, Annual Sector Accounts (ESA 2010), Financial Balance Sheets Variables analysed: annual unweighted mean and standard deviation

Total Economy Financial assets and liabilities have a rising trend Net financial liabilities decrease until 2006, rising during the Great Recession Since 2004 (all data available) there is a rising divergence in the size of financial liabilities and assets and in net financial assets

Non-Financial Corporations Since the decade of the 2000s the mean size of financial assets and liabiliites has increased, though the size of net financial liabiliites has remained quite stable The divergence among countries has risen in this period in the case of financial assets and liabilities (except in 2008), although the differences in the case of net financial liabilities are much more stable

Financial Corporations The size of financial assets and liabilities have kept a rising trend. However, there is a change in the sign of net financial assets, and since 2008 financial corporations register a rising creditor position. This larger creditor position of euro financial corporations comes with a higher dispersal

Households Assets have a rising tendency, only interrumpted in Financial liabilities increase until 2009; since then they register a small decline (4% GDP) Net financial assets, falling between 2006 and 2008, have a significant increase since 2011 (+22 p.p. of GDP) The dispersal of the households’ financial balance sheet increase until 2006, due to a higher dispersal in assets (and net financial assets). Since 2008, there is a higher divergence mainly in assets (differences do not change in the case of financial liabilities)

General Governments Until 2007 there is a decline in the size of financial liabilities and an improvement in the debtor position (fall of net financial liabilities) Since 2008, there is an increase in the size of assets and liabilities, with a huge deterioration in the debtor position The Great Recession has led to a larger divergence, mainly in the size of financial liabilities and the net financial position

3. The impact of the Great Recession on the composition of financial balance sheets Objective: To establish a typology of countries according to the evolution of the net financial assets and the reasons (change in assets and/or liabilities) explaining this change We have analysed the changes registered in the size (percentage of GDP) of financial balance sheets of euro countries (by sectors) in two subperiods: and Two typologies: before and during the Great Recession 6 possible groups of countries can be obtained: Group 1: increase of financial assets and liabilities, and increase of net financial assets Group 2: increase of financial assets and liabilities, and decline of net financial assets Grupo 3: decline of financial assets and liabilities, and increase of net financial assets Grupo 4: decline of financial assets and liabilities, and decline of net financial assets Grupo 5: increase of financial assets, decline of financial liabilities, and increase of net financial assets Grupo 6: decline of financial assets, increase of financial liabilities, and decline of net financial assets Groups 1 and 2: financialisation process Groups 3 and 4: de-financialisation process Groups 5 and 6: indeterminate process

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Total Economy CHANGES IN THE FINANCIAL BALANCE SHEETS Group 1: Austria, Cyprus, Germany, Luxembourg and Netherlands. Group 2: Belgium, Estonia, France, Greece, Ireland, Italy, Latvia, Lithuania, Malta, Portugal, Slovenia and Spain. Group 4: Slovakia Group 5: Finland Group 1: Austria, Finland, Latvia, Lithuania, Malta and Netherlands. Group 2: France, Greece, Ireland, Italy, Luxembourg, Portugal, Slovakia, Slovenia and Spain. Group 3: Belgium y Germany. Group 5: Estonia, Group 6: Cyprus.

Total Economy NET FINANCIAL POSITION Net Creditor Position (NFA+): Belgium. Net Debtor Position (NFA-): Austria, Cyprus, Estonia, Finland, Greece, Ireland, Italy, Latvia, Lithuania, Netherlands, Portugal, Slovenia, Slovakia and Spain. From Debtor (NFA-) to Creditor Position (NFA+): Germany and Luxembourg From Creditor (NFA+) to Debtor Position (NFA-): France and Malta Net Creditor Position (NFA+): Belgium and Germany Net Debtor Position (NFA-): Cyprus, Estonia, France, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovakia, Slovenia and Spain From Debtor (NFA-) to Creditor Position (NFA+): Austria, Finland, Malta and Netherlands From Creditor (NFA+) to Debtor Position (NFA-): Luxembourg

Non-Financial Corporations CHANGES IN THE FINANCIAL BALANCE SHEETS Group 1: Austria and Luxembourg Group 2: Belgium, Estonia, Ireland, Italy, Lithuania, Malta, Portugal, Slovenia and Spain Group 3: Cyprus, France, Germany and Slovakia Group 5: Finland, Greece and Netherlands Group 6: Latvia Group 1: Malta, Netherlands and Spain Group 2: Austria, Belgium, Estonia, Finland, France, Germany, Greece, Ireland, Latvia, Luxembourg, Portugal and Slovakia Group 5: Italy and Lithuania Group 6: Cyprus and Slovenia

Financial Corporations CHANGES IN THE FINANCIAL BALANCE SHEETS Group 1: Austria, Cyprus, Estonia, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg and Spain Group 2: Belgium, Finland, Ireland, France, Malta, Netherlands, Portugal and Slovenia Group 3: Slovakia Group 1: Finland France, Greece, Ireland, Italy and Slovakia Group 2: Latvia, Luxembourg, Malta, Netherlands and Spain Group 3: Austria, Belgium, Cyprus, Estonia, Germany and Slovenia Group 4: Lithuania Group 5: Portugal

Financial Corporations NET FINANCIAL POSITION Net Creditor Position (NFA+): France, Germany, Luxembourg, Portugal, Slovenia and Spain Net Debtor Position (NFA-): Austria, Greece, Ireland and Slovakia From Debtor (NFA-) to Creditor Position (NFA+): Cyprus, Estonia, Italy, Latvia and Lithuania From Creditor (NFA+) to Debtor Position (NFA-): Belgium, Finland, Malta and Netherlands Net Creditor Position (NFA+): Cyprus, Estonia, France, Germany, Italy, Luxembourg, Portugal, Slovenia and Spain Net Debtor Position (NFA-): Malta and Netherlands From Debtor (NFA-) to Creditor Position (NFA+): Austria, Belgium, Finland, Greece, Ireland and Slovakia From Creditor (NFA+) to Debtor Position (NFA-): Latvia and Lithuania

Households CHANGES IN THE FINANCIAL BALANCE SHEETS Group 1: Austria, Luxembourg and Slovenia Group 2: Estonia, Ireland, Latvia Lithuania, Malta and Portugal, Group 3: Germany Group 6: Belgium, Cyprus, Finland, France, Greece, Italy, Netherlands, Slovakia and Spain Group 1: Belgium, Cyprus, Finland, France, Greece, Italy, Luxembourg, Malta, Netherlands, Slovenia and Slovakia. Group 5: Austria Estonia, Germany, Ireland, Latvia, Lithuania, Portugal and Spain

Households NET FINANCIAL POSITION Net Creditor Position (NFA+): France, Germany, Luxembourg, Portugal, Slovenia and Spain Net Debtor Position (NFA-): Austria, Greece, Ireland and Slovakia From Debtor (NFA-) to Creditor Position (NFA+): Cyprus, Estonia, Italy, Latvia and Lithuania From Creditor (NFA+) to Debtor Position (NFA-): Belgium, Finland, Malta and Netherlands Net Creditor Position (NFA+): Cyprus, Estonia, France, Germany, Italy, Luxembourg, Portugal, Slovenia and Spain Net Debtor Position (NFA-): Malta and Netherlands From Debtor (NFA-) to Creditor Position (NFA+): Austria, Belgium, Finland, Greece, Ireland and Slovakia From Creditor (NFA+) to Debtor Position (NFA-): Latvia and Lithuania

General Governments CHANGES IN THE FINANCIAL BALANCE SHEETS Group 2: Austria, Latvia, and Luxembourg Group 3: Cyprus, Finland, Malta and Netherlands Group 4: Estonia, Lithuania, Slovakia and Slovenia. Group 5: Belgium, Ireland, Italy and Spain. Group 6: France, Germany, Greece and Portugal Group 1: Estonia and Finland Group 2: Austria, Belgium, Cyprus, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Portugal, Slovakia, Slovenia and Spain Group 3: Netherlands NET FINANCIAL POSITION Net Debtor Position (NFA-) Since 1999: Austria, Belgium, Cyprus, France, Germany, Greece, Ireland (with the exception of the year 2007), Italy, Malta, Netherlands, Portugal, Slovakia and Spain Net Creditor Position (NFA+) Since 1999: Estonia, Finland and Luxembourg From Creditor (NFA+) to Debtor Position (NFA-): Latvia, Lithuanis and Slovenia

4. Financialisation and economic activity It is argued that financialisation affects decisions made by families and corporations, affecting consumption and investment. Our objective is to analyse whether the evolucion of the financial balance sheets before and during the Great Recession has affected the evolution of economic activity (GDP), investment (total gross fixed capital formation GFCF, and GFCF of non- financial corporations), households’ consumption and households’ saving rate. Cross-section regressions for two periods: , y i = β 0 + β 1 X i + ui y i = β 0 + β 1 X i + β 2 X 2 i + u i Independent explanatory variables are the variation of net financial assets, financial assets and financial variables (% of GDP)

4.2 Financialisation and real GDP Dependent variable: Percent change of Real GDP (GDP t -GDP t-n /GDP t-n *100) Independent variables: change as % of GDP (X t -X t-n ) of Net Financial Assets, Financial Assets and Financial Liabilities of Total Economy In the period , available data start later for some countries: Ireland and Slovenia (2001), Luxembourg (2002), Latvia and Malta (2004) In and , there is no significant relation (linear or quadratic) between GDP change and change of net financial assets, financial assets or financial liabilities

4.2 Financialisation and Gross Fixed Capital Formation of Total Economy Dependent variable: Percent change of Real GFCF (GFCF t -GFCF t-n /GFCF t-n *100) Independent variables: change as % of GDP (X t -X t-n ) of Net Financial Assets, Financial Assets and Financial Liabilities of Total Economy In the period , available data start later for some countries: Ireland and Slovenia (2001), Luxembourg (2002), Latvia and Malta (2004) In and , there is no significant relation (linear or quadratic) between GFCF change and change of net financial assets, financial assets or financial liabilities

4.3 Financialisation and Gross Fixed Capital Formation of Non-Financial Corporations Dependent variable: Percent change of Real GFCF of NFCs (GFCF t -GFCF t-n /GFCF t-n *100) Independent variables: change as % of GDP (X t -X t-n ) of Net Financial Assets, Financial Assets and Financial Liabilities of Non-Financial Corporations In the period , available data start later for some countries: Ireland and Slovenia (2001), Luxembourg (2002), Latvia, Lithuania and Malta (2004), Greece (2006). Unavailable data (GFCF NFCs) for Malta and Luxembourg. In , there is no significant relation (linear or quadratic) between GFCF change and change of net financial assets, financial assets or financial liabilities

During the Great Recession, change of financial assets has a positive but decreasing effect on change of GFCF of NFCs (inflection point: 189.3% of GDP). Change of financial liabilities has a positive impact on change of GDP C (0.000) (0.000) Assets1.01 (0.001) Assets (0.013) Liabilities0.207 (0.000) R2R F-statistics (0.000) Wald F-statistics (0.000) DW JB0.433 (0.805)3.703 (0.157)

4.4 Financialisation and private consumption Dependent variable: Percent change of Real Private Final Consumption (C t -C t-n /C t-n *100) Independent variables: change as % of GDP (X t -X t-n ) of Net Financial Assets, Financial Assets and Financial Liabilities of Households In the period , available data start later for some countries: Ireland and Slovenia (2001), Latvia and Malta (2004), Luxembourg (2006). During the Great Recession, there is no significant relation between consumption, and net financial assets, financial assets or financial liabilities

There is a significant direct relationship between the change in Private Consumption growth and the change in Financial Assets (quadratic: positive and increasing) and Financial Liabilities Larger increases of financial assets and liabilities were associated with larger increases of private consumption C27.08 (0.000)12.44 (0.235) Assets0.70 (0.023) Assets (0.036) Liabilities0.85 (0.026) R2R F-statistics3.430 (0.057)5.885 (0.026) DW JB (0.360)5.845 (0.053)

4.5 Financialisation and Households Gross Saving Rate Dependent variable: Variation of Households Gross Saving Rate (S t -S t-n ) Independent variables: change as % of GDP (X t -X t-n ) of Net Financial Assets, Financial Assets and Financial Liabilities of Total Economy In the period , available data start later for some countries: Ireland and Slovenia (2001), Latvia (2004), Luxembourg (2006). Unavailable data for Malta

There is a significant direct relationship between the change in the Households Gross Saving Rate and the change in Net Financial Assets No significant relation found C0.892 (0.437) Net Financial Assets0.05 (0.059) R2R F-statistics4.130 (0.059) DW2.76 JB6.474 (0.039)

5. Summary and Conclusions The analysis of the financial balance sheets in the Euro countries confirms the hypothesis of a variegated financialisation process. Significant differences arise among Euro countries when we analyze the total and the sectoral financial balance sheets. Differences exist non only between “old” and “new” euro countries, but also within these two groups. Empirical analysis shows that, although financialisation process (before and during the Great Recession) has not affected general economic activity (GDP-GFCF), it has had an impact on the decisions made by non-financial private sectors (household’s consumption and saving, investment by non-financial corporations).