## wp1810

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---

### Capital flows, banking, and boom-bust dynamics
- Cross-border claims in euros of euro area banks rose from below €1 trillion in 1998 to close to €10 trillion at the peak in 2008.
- Banks in core countries increased substantially their claims on banks in periphery countries, contributing to strong growth in domestic—especially bank—credit to the private non-financial sector in periphery countries.
- Banks concentrated new lending in low-productivity sectors, especially housing, construction and other real estate activities, fueling housing price bubbles in Spain and Ireland and increasing risks to financial stability.
- When the euro area crisis hit in 2010, capital flows were reversed, forcing rapid adjustment and retrenchment of cross-border bank lending, which weakened periphery banks’ balance sheets and reinforced the credit crunch, hindering the reallocation of labor and capital.
- Empirical correlation: over the 1999-2007 period there is a strong cross-country correlation between the increase in cross-border liabilities of high-financial cycle amplitude countries’ banks and the average growth differential between these countries’ financial cycles and the financial cycles of low-amplitude countries.

### Foreign direct investment and regional specialization
- Foreign direct investment (FDI) flowed disproportionately to Central European countries rather than other euro area countries.
- The rise of the German-Central European Supply Chain starting in the 1990s led to rapid expansion in bilateral trade linkages between Germany and the Czech Republic, Hungary, Poland, and the Slovak Republic.
- Supply chain production was supported by large FDI flows from Germany, in contrast to FDI flows to Southern EMU countries.
- Following the introduction of the euro, manufacturing activity stabilized in Northern euro area countries (led by Germany) and declined in Southern countries.

### Structural reforms, product market competition, and labor taxation
- EMU membership did not generate structural reforms beyond what was observed in other advanced economies.
- Euro area countries reduced barriers to competitiveness in their product markets between 1988 and 2013; the overall level of competition barriers decreased by about one third in this period, though progress differed across subcategories.
- The degree of dispersion of the level of competition barriers across euro area countries has not declined over time.
- Labor tax policies diverged in the first ten years of EMU, increasing the dispersion of labor tax wedges with the introduction of the euro in 1999; tax wedges across EMU countries converged again from 2009 onwards, reaching in 2015 a level of convergence last observed in the early 1990s.
- Note on measurement: tax wedge is a simple average of tax wedge at 100 percent of average earnings for single person and single-earner married couple with two children; two time series with slightly different methodologies have been combined to lengthen the time series.

### Competitiveness gaps, external imbalances, and productivity
- Widening competitiveness gaps emerged as wage growth outpaced productivity growth in many countries, contributing to persistent inflation differentials and divergent real effective exchange rates.
- More competitive economies such as Germany experienced widening current account surpluses, while countries with weaker productivity growth and higher inflation such as Spain saw widening deficits.
- Adjustment since 2008 has been highly asymmetric: current account deficits fell substantially in crisis countries—largely through import contraction—while surplus countries have not adjusted and in some cases have seen their imbalances rise further.
- Change in Unit Labor Cost in selected EA countries, 1995-2015: decomposition shows contributions from productivity and wages to unit labor cost changes.
- Capital flow-driven booms supplied exuberant investment to low-productivity sectors, exacerbating disequilibria between productivity and compensation, undermining incentives for efficient resource allocation and sustainable growth.
- Resulting effects included unsustainable booms, large current account imbalances, pro-cyclical fiscal policy in recipient countries, resource misallocation, and lower potential output.
- Empirical relationship illustrated: credit growth and average change in current account balance, 1999-2007, with R² = 0.7786 across listed countries.

### Fiscal policy, the Stability and Growth Pact, and cyclical amplification
- The Stability and Growth Pact (SGP) was intended to prevent national fiscal policies from producing negative spillovers and to discipline national fiscal policies, but it did not fully prevent pro-cyclical fiscal policies before the crisis.
- Compliance with SGP rules was weak and the complexity of the framework hampered effective monitoring.
- Most countries built insufficient fiscal buffers in good times, forcing them to undertake large consolidations in an exceptional downturn.
- Fiscal policy tended to exacerbate cycles in some countries, likely contributing to growing differences in business cycle amplitudes across euro area countries since the crisis.
- The absence of a common fiscal capacity significantly limited the ability to conduct countercyclical fiscal policy and cushion asymmetric shocks within the EMU.
- Structural fiscal balance and output gap dynamics, 1999-2016: plots indicate episodes of pro-cyclical and counter-cyclical fiscal policy at the euro area and country level (Germany, France, Italy, Spain).

### Box 1. Real Income Convergence Across U.S. States — key points
- Evidence of convergence (β- and σ-convergence):
  - Using data for personal income per capita since 1929, poorer U.S. states grew faster than richer ones (β-convergence).
  - Income dispersion was reduced considerably until the 1970s, remaining flat thereafter (σ-convergence).
  - The panel/chart for "Average growth rate, 1929-2014 (Personal income per capita, 1929 β-Convergence Across U.S. States, 1929-2014)" shows numerical values along a scale: 1.8, 2, 2.2, 2.4, 2.6, 2.4, 2.6, 2.8, 3, 3.2.
- Role of fiscal transfers in supporting convergence:
  - The U.S. federal budget smooths around 15 percent of idiosyncratic shocks to state incomes (Sørensen and Yosha (1998)).
- Comparison with euro area income dispersion:
  - The coefficient of variation across U.S. states is currently 0.17.
  - The coefficient of variation for EA-12 countries was 0.15 at its lowest level in 1998, and is currently 0.26.
  - Interpretation: income dispersion across U.S. states is in the same ball park as dispersion across euro area countries; this suggests that income convergence may not be crucial for a well-functioning monetary union, particularly if fiscal transfers are allowed to smoothen the impact of asymmetric shocks.
- Data and visual measures referenced:
  - Data source: U.S. Bureau of Economic Analysis.
  - Time horizon emphasized: personal income per capita since 1929.
  - σ-Convergence chart timeframe: 1929–2014 (per capita personal income), with a time axis labeled 1929 1939 1949 1959 1969 1979 1989 1999 2009.

### Appendix Table 3: Concordance of Business Cycles, 2007q2-2015q1 — selected bilateral concordance values
- AUT vs AUT 1.00
- BEL vs AUT 0.75; BEL 1.00
- FIN vs AUT 0.63; FIN vs BEL 0.75; FIN 1.00
- FRA vs AUT 0.66; FRA vs BEL 0.72; FRA vs FIN 0.91; FRA 1.00
- DEU vs AUT 0.84; DEU vs BEL 0.84; DEU vs FIN 0.78; DEU vs FRA 0.75; DEU 1.00
- GRC vs AUT 0.56; GRC vs BEL 0.69; GRC vs FIN 0.56; GRC vs FRA 0.59; GRC vs DEU 0.59; GRC 1.00
- IRL vs AUT 0.88; IRL vs BEL 0.81; IRL vs FIN 0.75; IRL vs FRA 0.78; IRL vs DEU 0.91; IRL vs GRC 0.56; IRL 1.00
- ITA vs AUT 0.78; ITA vs BEL 0.78; ITA vs FIN 0.78; ITA vs FRA 0.81; ITA vs DEU 0.94; ITA vs GRC 0.66; ITA vs IRL 0.84; ITA 1.00
- NLD vs AUT 0.75; NLD vs BEL 0.75; NLD vs FIN 0.75; NLD vs FRA 0.72; NLD vs DEU 0.78; NLD vs GRC 0.50; NLD vs IRL 0.81; NLD vs ITA 0.72; NLD 1.00
- PRT vs AUT 0.66; PRT vs BEL 0.78; PRT vs FIN 0.84; PRT vs FRA 0.75; PRT vs DEU 0.81; PRT vs GRC 0.66; PRT vs IRL 0.72; PRT vs ITA 0.81; PRT vs NLD 0.72; PRT 1.00
- ESP vs AUT 0.63; ESP vs BEL 0.81; ESP vs FIN 0.88; ESP vs FRA 0.78; ESP vs DEU 0.78; ESP vs GRC 0.56; ESP vs IRL 0.75; ESP vs ITA 0.72; ESP vs NLD 0.88; ESP vs PRT 0.78; ESP 1.00
- Row/column means reported: 0.71 0.77 0.76 0.75 0.80 0.59 0.78 0.78 0.74 0.75 0.76 0.75 0.77
- Emphasis: bilateral concordance among euro area countries during 2007q2-2015q1 shows variation across pairs, with several high concordance values (e.g., IRL vs DEU 0.91; ITA vs DEU 0.94) and lower values for Greece (GRC mean 0.59).

### Appendix Tables 4–6: Concordance of Financial Cycles by period — selected values and means
- Concordance, 1971q2-1998q4 (selected):
  - AUT 1.00
  - BEL vs AUT 0.73; BEL 1.00
  - FIN vs AUT 0.66; FIN 1.00
  - FRA vs AUT 0.86; FRA 1.00
  - DEU vs AUT 0.82; DEU 1.00
  - GRC vs AUT 0.74; GRC 1.00
  - IRL vs AUT 0.80; IRL 1.00
  - ITA vs AUT 0.63; ITA 1.00
  - NLD vs AUT 0.70; NLD 1.00
  - PRT vs AUT 0.47; PRT 1.00
  - ESP vs AUT 0.66; ESP 1.00
  - Mean (by country rows): 0.71 0.67 0.65 0.70 0.66 0.58 0.66 0.65 0.63 0.53 0.66 0.65 0.66
- Concordance, 1999q1-2007q1 (selected):
  - AUT 1.00
  - BEL vs AUT 0.94; BEL 1.00
  - FIN vs AUT 0.85; FIN 1.00
  - FRA vs AUT 0.24; FRA 1.00
  - DEU vs AUT 0.55; DEU 1.00
  - GRC vs AUT 0.79; GRC 1.00
  - IRL vs AUT 0.85; IRL 1.00
  - ITA vs AUT 0.52; ITA 1.00
  - NLD vs AUT 0.79; NLD 1.00
  - PRT vs AUT 0.70; PRT 1.00
  - ESP vs AUT 0.33; ESP 1.00
  - Mean (by country rows): 0.65 0.67 0.69 0.38 0.44 0.68 0.61 0.55 0.59 0.60 0.45 0.57 0.49
- Concordance, 2007q2-2015q1 (selected):
  - AUT 1.00
  - BEL vs AUT 0.81; BEL 1.00
  - FIN vs AUT 0.94; FIN 1.00
  - FRA vs AUT 0.94; FRA 1.00
  - DEU vs AUT 0.38; DEU 1.00
  - GRC vs AUT 0.75; GRC 1.00
  - IRL vs AUT 0.94; IRL 1.00
  - ITA vs AUT 0.91; ITA 1.00
  - NLD vs AUT 0.94; NLD 1.00
  - PRT vs AUT 0.50; PRT 1.00
  - ESP vs AUT 0.91; ESP 1.00
  - Mean (by country rows): 0.80 0.75 0.80 0.78 0.32 0.69 0.80 0.78 0.81 0.52 0.75 0.71 0.64

### Appendix Table 7: Concordance of low-amplitude countries’ financial cycles with high-amplitude countries
- Concordance values by period (rows = country):
  - AUT: 1971-1998 0.73; 1999-2007 0.66; 2007-2015 0.86; 1999-2015 0.75
  - BEL: 0.72; 0.64; 0.80; 0.72
  - FIN: 0.62; 0.73; 0.86; 0.74
  - FRA: 0.68; 0.57; 0.84; 0.70
  - DEU: 0.65; 0.32; 0.28; 0.42
  - ITA: 0.59; 0.72; 0.85; 0.72
  - NLD: 0.72; 0.52; 0.86; 0.70
  - PRT: 0.48; 0.52; 0.57; 0.52
- Aggregate means:
  - Mean by period: 0.65 0.58 0.74
  - Mean (ex. Germany): 0.65 0.62 0.81

### Appendix Table 8: Financial cycle growth differential relative to high-amplitude countries (negative values indicate lower growth)
- Growth differentials by country and period:
  - AUT: -2.71; -3.53; -4.39; -3.54
  - BEL: -3.41; -3.50; -4.36; -3.76
  - FIN: -2.75; -2.37; -3.79; -2.97
  - FRA: -2.60; -2.94; -5.24; -3.60
  - DEU: -2.92; -3.92; -6.41; -4.42
  - ITA: -3.37; -2.57; -3.91; -3.28
  - NLD: -3.53; -4.78; -4.36; -4.23
  - PRT: -4.74; -4.78; -4.57; -4.70
- Aggregate means:
  - Mean by period: -3.26 -3.55 -4.63
  - Mean (ex. Germany): -3.30 -3.50 -4.38

### Appendix Table 9: Concordance and Growth Differential between National Business Cycles and Financial Cycles
- By country and period (Concordance; Growth differential):
  - AUT: 1971-1998 0.51 -1.67; 1999-2007 0.67 -1.03; 2007-2015 0.44 -2.60
  - BEL: 0.49 -1.93; 0.67 -1.08; 0.69 -2.53
  - FIN: 0.54 -1.92; 0.67 -2.46; 0.69 -3.20
  - FRA: 0.50 -1.31; 0.39 -1.09; 0.66 -1.72
  - DEU: 0.58 -0.96; 0.52 -1.54; 0.34 -1.90
  - GRC: 0.45 -2.31; 0.48 -2.54; 0.44 -5.51
  - IRL: 0.49 -2.11; 0.45 -3.49; 0.63 -8.19
  - ITA: 0.49 -2.06; 0.64 -1.71; 0.69 -3.01
  - NLD: 0.53 -2.33; 0.61 -2.45; 0.69 -3.36
  - PRT: 0.49 -2.49; 0.55 -2.66; 0.59 -2.55
  - ESP: 0.45 -1.97; 0.48 -4.30; 0.66 -5.81
- Aggregate means:
  - Mean: 0.50 -1.91; 0.56 -2.21; 0.59 -3.67
  - GDP-weighted mean: 0.51 -1.59; 0.53 -1.95; 0.56 -2.93

### Appendix Figures — Key empirical patterns and interpretations
- Financial cycles (Appendix Figure 1):
  - The euro area experienced a financial cycle upswing from the start of the euro until the financial crisis.
  - High-amplitude countries (Greece, Ireland, Spain) experienced financial cycles of increasing duration and magnitude.
  - High-amplitude countries diverged from Germany following euro introduction, reflected in declining concordance and increasing growth differentials between Germany and high-amplitude countries.
  - Financial cycle concordance between Germany and high-amplitude countries declined more than Germany’s concordance with the overall euro area.
  - Financial cycle growth differentials between Germany and high-amplitude countries increased more than differentials between Germany and the euro area.
- Capital flows (Appendix Figure 2):
  - Cross-border capital flows in the euro area increased dramatically over time.
  - Claims on periphery countries (all sectors) and claims by the banking sector rose substantially.
  - Liabilities of periphery countries to core countries increased (all sectors and banking sector), with the share of periphery liabilities to core continuing to increase, suggesting larger outflows to outside the EA.
  - Cross-Border Euro Claims by Euro Area Banks show assets and liabilities time series in trillions of US dollars.
  - Euro Area Net Private Inflows (percent of GDP): net creditor inflows and net debtor inflows contributed to total net private capital inflows; creditor countries defined as Austria, Belgium, Germany, Luxembourg, Malta, and Netherlands.
- Credit to the private non-financial sector (Appendix Figure 3):
  - Credit growth diverged across countries, with some countries experiencing a surge after euro introduction.
  - Divergence particularly large between Germany and high-amplitude countries.
  - Divergence reflected in growth of credit to households and credit to firms.
  - Housing price inflation diverged: housing prices increased most for countries with large financial cycles, while housing prices picked up in Germany in recent years.
  - Time series and indices shown (sources: BIS; GDP-weighted averages; index 1995=100).
- Credit growth and current account balances (Appendix Figure 4):
  - Credit fueled housing bubbles.
  - Real interest rates were highly correlated with inflation during the 1999-2007 boom period (R² = 0.9649 for Real Interest Rates and Inflation, 1999-2007).
  - Credit growth was higher where real interest rates were lower (R² = 0.7754 for Real Interest Rates and Credit Growth, 1999-2007).
  - Higher credit growth correlated with larger current account deterioration/larger capital inflows (R² = 0.7786 for Credit Growth and Current Account Balance Change, 1999-2007).
- Structural reform convergence (Appendix Figure 5):
  - Barriers to competition in services were reduced.
  - Administrative burden on start-ups was lowered.
  - Sectoral composition of periphery credit to households and non-financial corporations displayed by sector (Industry and agriculture; Consumption and services; Housing, real estate, construction).

*Source: wp1810 (IMF staff calculations and cited studies as presented in the source content).*

### introduction

### introduction

### Capital flows, banking, and boom-bust dynamics
- Cross-border claims in euros of euro area banks rose from below €1 trillion in 1998 to close to €10 trillion at the peak in 2008.
- Banks in core countries increased substantially their claims on banks in periphery countries, contributing to strong growth in domestic—especially bank—credit to the private non-financial sector in periphery countries.
- Banks concentrated new lending in low-productivity sectors, especially housing, construction and other real estate activities, fueling housing price bubbles in Spain and Ireland and increasing risks to financial stability.
- When the euro area crisis hit in 2010, capital flows were reversed, forcing rapid adjustment and retrenchment of cross-border bank lending, which weakened periphery banks’ balance sheets and reinforced the credit crunch, hindering the reallocation of labor and capital.
- Empirical correlation: over the 1999-2007 period there is a strong cross-country correlation between the increase in cross-border liabilities of high-financial cycle amplitude countries’ banks and the average growth differential between these countries’ financial cycles and the financial cycles of low-amplitude countries.

### Foreign direct investment and regional specialization
- Foreign direct investment (FDI) flowed disproportionately to Central European countries rather than other euro area countries.
- The rise of the German-Central European Supply Chain starting in the 1990s led to rapid expansion in bilateral trade linkages between Germany and the Czech Republic, Hungary, Poland, and the Slovak Republic.
- Supply chain production was supported by large FDI flows from Germany, in contrast to FDI flows to Southern EMU countries.
- Following the introduction of the euro, manufacturing activity stabilized in Northern euro area countries (led by Germany) and declined in Southern countries.

### Structural reforms, product market competition, and labor taxation
- EMU membership did not generate structural reforms beyond what was observed in other advanced economies.
- Euro area countries reduced barriers to competitiveness in their product markets between 1988 and 2013; the overall level of competition barriers decreased by about one third in this period, though progress differed across subcategories.
- The degree of dispersion of the level of competition barriers across euro area countries has not declined over time.
- Labor tax policies diverged in the first ten years of EMU, increasing the dispersion of labor tax wedges with the introduction of the euro in 1999; tax wedges across EMU countries converged again from 2009 onwards, reaching in 2015 a level of convergence last observed in the early 1990s.
- Note on measurement: tax wedge is a simple average of tax wedge at 100 percent of average earnings for single person and single-earner married couple with two children; two time series with slightly different methodologies have been combined to lengthen the time series.

### Competitiveness gaps, external imbalances, and productivity
- Widening competitiveness gaps emerged as wage growth outpaced productivity growth in many countries, contributing to persistent inflation differentials and divergent real effective exchange rates.
- More competitive economies such as Germany experienced widening current account surpluses, while countries with weaker productivity growth and higher inflation such as Spain saw widening deficits.
- Adjustment since 2008 has been highly asymmetric: current account deficits fell substantially in crisis countries—largely through import contraction—while surplus countries have not adjusted and in some cases have seen their imbalances rise further.
- Change in Unit Labor Cost in selected EA countries, 1995-2015: decomposition shows contributions from productivity and wages to unit labor cost changes.
- Capital flow-driven booms supplied exuberant investment to low-productivity sectors, exacerbating disequilibria between productivity and compensation, undermining incentives for efficient resource allocation and sustainable growth.
- Resulting effects included unsustainable booms, large current account imbalances, pro-cyclical fiscal policy in recipient countries, resource misallocation, and lower potential output.
- Empirical relationship illustrated: credit growth and average change in current account balance, 1999-2007, with R² = 0.7786 across listed countries.

### Fiscal policy, the Stability and Growth Pact, and cyclical amplification
- The Stability and Growth Pact (SGP) was intended to prevent national fiscal policies from producing negative spillovers and to discipline national fiscal policies, but it did not fully prevent pro-cyclical fiscal policies before the crisis.
- Compliance with SGP rules was weak and the complexity of the framework hampered effective monitoring.
- Most countries built insufficient fiscal buffers in good times, forcing them to undertake large consolidations in an exceptional downturn.
- Fiscal policy tended to exacerbate cycles in some countries, likely contributing to growing differences in business cycle amplitudes across euro area countries since the crisis.
- The absence of a common fiscal capacity significantly limited the ability to conduct countercyclical fiscal policy and cushion asymmetric shocks within the EMU.
- Structural fiscal balance and output gap dynamics, 1999-2016: plots indicate episodes of pro-cyclical and counter-cyclical fiscal policy at the euro area and country level (Germany, France, Italy, Spain).

*Source: wp1810 - introduction (IMF staff calculations and cited studies as presented in the source content).*

### Box 1. Real Income Convergence Across U.S. States

### Box 1. Real Income Convergence Across U.S. States

### Evidence of convergence (β- and σ-convergence)
- Using data for personal income per capita since 1929, poorer U.S. states grew faster than richer ones (β-convergence).
- Income dispersion was reduced considerably until the 1970s, remaining flat thereafter (σ-convergence).
- The panel/chart for "Average growth rate, 1929-2014 (Personal income per capita, 1929 β-Convergence Across U.S. States, 1929-2014)" shows numerical values along a scale: 1.8, 2, 2.2, 2.4, 2.6, 2.4, 2.6, 2.8, 3, 3.2.

### Role of fiscal transfers in supporting convergence
- The U.S. federal budget smooths around 15 percent of idiosyncratic shocks to state incomes (Sørensen and Yosha (1998)).

### Comparison with euro area income dispersion
- The coefficient of variation across U.S. states is currently 0.17.
- The coefficient of variation for EA-12 countries was 0.15 at its lowest level in 1998, and is currently 0.26.
- Interpretation offered: income dispersion across U.S. states is in the same ball park as dispersion across euro area countries; this suggests that income convergence may not be crucial for a well-functioning monetary union, particularly if fiscal transfers are allowed to smoothen the impact of asymmetric shocks.

### Data and visual measures referenced
- Data source: U.S. Bureau of Economic Analysis.
- Time horizon emphasized: personal income per capita since 1929.
- σ-Convergence chart timeframe: 1929–2014 (per capita personal income), with a time axis labeled 1929 1939 1949 1959 1969 1979 1989 1999 2009.

*Source: wp1810 - Box 1. Real Income Convergence Across U.S. States (IMF working paper content provided).*

### Appendix Table 3: Concordance of Business Cycles, 2007q2-2015q1

### Appendix Table 3: Concordance of Business Cycles, 2007q2-2015q1

### Bilateral concordance statistics (business cycles, 2007q2-2015q1)
- Country-by-country concordance matrix (rows vs columns shown): 
  - AUT vs AUT 1.00
  - BEL vs AUT 0.75, BEL 1.00
  - FIN vs AUT 0.63, FIN vs BEL 0.75, FIN 1.00
  - FRA vs AUT 0.66, FRA vs BEL 0.72, FRA vs FIN 0.91, FRA 1.00
  - DEU vs AUT 0.84, DEU vs BEL 0.84, DEU vs FIN 0.78, DEU vs FRA 0.75, DEU 1.00
  - GRC vs AUT 0.56, GRC vs BEL 0.69, GRC vs FIN 0.56, GRC vs FRA 0.59, GRC vs DEU 0.59, GRC 1.00
  - IRL vs AUT 0.88, IRL vs BEL 0.81, IRL vs FIN 0.75, IRL vs FRA 0.78, IRL vs DEU 0.91, IRL vs GRC 0.56, IRL 1.00
  - ITA vs AUT 0.78, ITA vs BEL 0.78, ITA vs FIN 0.78, ITA vs FRA 0.81, ITA vs DEU 0.94, ITA vs GRC 0.66, ITA vs IRL 0.84, ITA 1.00
  - NLD vs AUT 0.75, NLD vs BEL 0.75, NLD vs FIN 0.75, NLD vs FRA 0.72, NLD vs DEU 0.78, NLD vs GRC 0.50, NLD vs IRL 0.81, NLD vs ITA 0.72, NLD 1.00
  - PRT vs AUT 0.66, PRT vs BEL 0.78, PRT vs FIN 0.84, PRT vs FRA 0.75, PRT vs DEU 0.81, PRT vs GRC 0.66, PRT vs IRL 0.72, PRT vs ITA 0.81, PRT vs NLD 0.72, PRT 1.00
  - ESP vs AUT 0.63, ESP vs BEL 0.81, ESP vs FIN 0.88, ESP vs FRA 0.78, ESP vs DEU 0.78, ESP vs GRC 0.56, ESP vs IRL 0.75, ESP vs ITA 0.72, ESP vs NLD 0.88, ESP vs PRT 0.78, ESP 1.00
- Row/column means (reported):
  - Mean (by country row/column): 0.71 0.77 0.76 0.75 0.80 0.59 0.78 0.78 0.74 0.75 0.76 0.75 0.77
- Emphasis: bilateral concordance among euro area countries during 2007q2-2015q1 shows variation across pairs, with several high concordance values (e.g., IRL vs DEU 0.91; ITA vs DEU 0.94) and lower values for Greece (e.g., GRC mean 0.59).

---

### Appendix Tables 4–6: Concordance of Financial Cycles (1971q2-1998q4; 1999q1-2007q1; 2007q2-2015q1)

### Concordance, 1971q2-1998q4 (financial cycle bilateral concordance)
- Selected bilateral concordance entries:
  - AUT 1.00
  - BEL vs AUT 0.73; BEL 1.00
  - FIN vs AUT 0.66; FIN vs BEL 0.62; FIN 1.00
  - FRA vs AUT 0.86; FRA vs BEL 0.70; FRA vs FIN 0.72; FRA 1.00
  - DEU vs AUT 0.82; DEU vs BEL 0.57; DEU vs FIN 0.62; DEU vs FRA 0.77; DEU 1.00
  - GRC vs AUT 0.74; GRC vs BEL 0.49; GRC vs FIN 0.56; GRC vs FRA 0.62; GRC vs DEU 0.74; GRC 1.00
  - IRL vs AUT 0.80; IRL vs BEL 0.82; IRL vs FIN 0.57; IRL vs FRA 0.67; IRL vs DEU 0.68; IRL vs GRC 0.61; IRL 1.00
  - ITA vs AUT 0.63; ITA vs BEL 0.58; ITA vs FIN 0.79; ITA vs FRA 0.71; ITA vs DEU 0.70; ITA vs GRC 0.55; ITA vs IRL 0.56; ITA 1.00
  - NLD vs AUT 0.70; NLD vs BEL 0.90; NLD vs FIN 0.59; NLD vs FRA 0.62; NLD vs DEU 0.54; NLD vs GRC 0.53; NLD vs IRL 0.83; NLD vs ITA 0.48; NLD 1.00
  - PRT vs AUT 0.47; PRT vs BEL 0.41; PRT vs FIN 0.65; PRT vs FRA 0.55; PRT vs DEU 0.63; PRT vs GRC 0.55; PRT vs IRL 0.41; PRT vs ITA 0.80; PRT vs NLD 0.32; PRT 1.00
  - ESP vs AUT 0.66; ESP vs BEL 0.86; ESP vs FIN 0.73; ESP vs FRA 0.76; ESP vs DEU 0.55; ESP vs GRC 0.41; ESP vs IRL 0.69; ESP vs ITA 0.65; ESP vs NLD 0.81; ESP vs PRT 0.49; ESP 1.00
- Mean (by country rows): 0.71 0.67 0.65 0.70 0.66 0.58 0.66 0.65 0.63 0.53 0.66 0.65 0.66

### Concordance, 1999q1-2007q1 (financial cycle bilateral concordance)
- Selected bilateral concordance entries:
  - AUT 1.00
  - BEL vs AUT 0.94; BEL 1.00
  - FIN vs AUT 0.85; FIN vs BEL 0.85; FIN 1.00
  - FRA vs AUT 0.24; FRA vs BEL 0.24; FRA vs FIN 0.39; FRA 1.00
  - DEU vs AUT 0.55; DEU vs BEL 0.61; DEU vs FIN 0.45; DEU vs FRA 0.27; DEU 1.00
  - GRC vs AUT 0.79; GRC vs BEL 0.79; GRC vs FIN 0.94; GRC vs FRA 0.45; GRC vs DEU 0.39; GRC 1.00
  - IRL vs AUT 0.85; IRL vs BEL 0.79; IRL vs FIN 0.76; IRL vs FRA 0.33; IRL vs DEU 0.39; IRL vs GRC 0.76; IRL 1.00
  - ITA vs AUT 0.52; ITA vs BEL 0.52; ITA vs FIN 0.67; ITA vs FRA 0.73; ITA vs DEU 0.12; ITA vs GRC 0.73; ITA vs IRL 0.61; ITA 1.00
  - NLD vs AUT 0.79; NLD vs BEL 0.85; NLD vs FIN 0.70; NLD vs FRA 0.09; NLD vs DEU 0.76; NLD vs GRC 0.64; NLD vs IRL 0.64; NLD vs ITA 0.36; NLD 1.00
  - PRT vs AUT 0.70; PRT vs BEL 0.76; PRT vs FIN 0.79; PRT vs FRA 0.18; PRT vs DEU 0.67; PRT vs GRC 0.73; PRT vs IRL 0.55; PRT vs ITA 0.45; PRT vs NLD 0.91; PRT 1.00
  - ESP vs AUT 0.33; ESP vs BEL 0.33; ESP vs FIN 0.48; ESP vs FRA 0.91; ESP vs DEU 0.18; ESP vs GRC 0.55; ESP vs IRL 0.42; ESP vs ITA 0.82; ESP vs NLD 0.18; ESP vs PRT 0.27; ESP 1.00
- Mean (by country rows): 0.65 0.67 0.69 0.38 0.44 0.68 0.61 0.55 0.59 0.60 0.45 0.57 0.49

### Concordance, 2007q2-2015q1 (financial cycle bilateral concordance)
- Selected bilateral concordance entries:
  - AUT 1.00
  - BEL vs AUT 0.81; BEL 1.00
  - FIN vs AUT 0.94; FIN vs BEL 0.81; FIN 1.00
  - FRA vs AUT 0.94; FRA vs BEL 0.75; FRA vs FIN 0.94; FRA 1.00
  - DEU vs AUT 0.38; DEU vs BEL 0.38; DEU vs FIN 0.31; DEU vs FRA 0.31; DEU 1.00
  - GRC vs AUT 0.75; GRC vs BEL 0.81; GRC vs FIN 0.75; GRC vs FRA 0.69; GRC vs DEU 0.19; GRC 1.00
  - IRL vs AUT 0.94; IRL vs BEL 0.88; IRL vs FIN 0.94; IRL vs FRA 0.88; IRL vs DEU 0.31; IRL vs GRC 0.81; IRL 1.00
  - ITA vs AUT 0.91; ITA vs BEL 0.78; ITA vs FIN 0.97; ITA vs FRA 0.97; ITA vs DEU 0.28; ITA vs GRC 0.72; ITA vs IRL 0.91; ITA 1.00
  - NLD vs AUT 0.94; NLD vs BEL 0.88; NLD vs FIN 0.94; NLD vs FRA 0.88; NLD vs DEU 0.38; NLD vs GRC 0.81; NLD vs IRL 0.94; NLD vs ITA 0.91; NLD 1.00
  - PRT vs AUT 0.50; PRT vs BEL 0.69; PRT vs FIN 0.50; PRT vs FRA 0.44; PRT vs DEU 0.31; PRT vs GRC 0.75; PRT vs IRL 0.56; PRT vs ITA 0.47; PRT vs NLD 0.56; PRT 1.00
  - ESP vs AUT 0.91; ESP vs BEL 0.72; ESP vs FIN 0.91; ESP vs FRA 0.97; ESP vs DEU 0.34; ESP vs GRC 0.66; ESP vs IRL 0.84; ESP vs ITA 0.94; ESP vs NLD 0.84; ESP vs PRT 0.41; ESP 1.00
- Mean (by country rows): 0.80 0.75 0.80 0.78 0.32 0.69 0.80 0.78 0.81 0.52 0.75 0.71 0.64

---

### Appendix Table 7: Concordance of low-amplitude countries’ financial cycles with high-amplitude countries

- Concordance values by period (rows = country):
  - AUT: 1971-1998 0.73; 1999-2007 0.66; 2007-2015 0.86; 1999-2015 0.75
  - BEL: 0.72; 0.64; 0.80; 0.72
  - FIN: 0.62; 0.73; 0.86; 0.74
  - FRA: 0.68; 0.57; 0.84; 0.70
  - DEU: 0.65; 0.32; 0.28; 0.42
  - ITA: 0.59; 0.72; 0.85; 0.72
  - NLD: 0.72; 0.52; 0.86; 0.70
  - PRT: 0.48; 0.52; 0.57; 0.52
- Aggregate means:
  - Mean by period: 0.65 0.58 0.74
  - Mean (ex. Germany): 0.65 0.62 0.81

---

### Appendix Table 8: Financial cycle growth differential relative to high-amplitude countries

- Growth differentials by country and period (values are negative, indicating lower growth relative to high-amplitude countries):
  - AUT: -2.71; -3.53; -4.39; -3.54
  - BEL: -3.41; -3.50; -4.36; -3.76
  - FIN: -2.75; -2.37; -3.79; -2.97
  - FRA: -2.60; -2.94; -5.24; -3.60
  - DEU: -2.92; -3.92; -6.41; -4.42
  - ITA: -3.37; -2.57; -3.91; -3.28
  - NLD: -3.53; -4.78; -4.36; -4.23
  - PRT: -4.74; -4.78; -4.57; -4.70
- Aggregate means:
  - Mean by period: -3.26 -3.55 -4.63
  - Mean (ex. Germany): -3.30 -3.50 -4.38

---

### Appendix Table 9: Concordance and Growth Differential between National Business Cycles and Financial Cycles

- By country and period (Concordance; Growth differential):
  - AUT: 1971-1998 0.51 -1.67; 1999-2007 0.67 -1.03; 2007-2015 0.44 -2.60
  - BEL: 0.49 -1.93; 0.67 -1.08; 0.69 -2.53
  - FIN: 0.54 -1.92; 0.67 -2.46; 0.69 -3.20
  - FRA: 0.50 -1.31; 0.39 -1.09; 0.66 -1.72
  - DEU: 0.58 -0.96; 0.52 -1.54; 0.34 -1.90
  - GRC: 0.45 -2.31; 0.48 -2.54; 0.44 -5.51
  - IRL: 0.49 -2.11; 0.45 -3.49; 0.63 -8.19
  - ITA: 0.49 -2.06; 0.64 -1.71; 0.69 -3.01
  - NLD: 0.53 -2.33; 0.61 -2.45; 0.69 -3.36
  - PRT: 0.49 -2.49; 0.55 -2.66; 0.59 -2.55
  - ESP: 0.45 -1.97; 0.48 -4.30; 0.66 -5.81
- Aggregate means:
  - Mean: 0.50 -1.91; 0.56 -2.21; 0.59 -3.67
  - GDP-weighted mean: 0.51 -1.59; 0.53 -1.95; 0.56 -2.93

---

### Appendix Figures — Key empirical patterns and interpretations

### Financial cycles (Appendix Figure 1)
- Observations:
  - The euro area experienced a financial cycle upswing from the start of the euro until the financial crisis.
  - High-amplitude countries (Greece, Ireland, Spain) experienced financial cycles of increasing duration and magnitude.
  - High-amplitude countries diverged from Germany following euro introduction, reflected in declining concordance and increasing growth differentials between Germany and high-amplitude countries.
  - Financial cycle concordance between Germany and high-amplitude countries declined more than Germany’s concordance with the overall euro area.
  - Financial cycle growth differentials between Germany and high-amplitude countries increased more than differentials between Germany and the euro area.

### Capital flows (Appendix Figure 2)
- Observations:
  - Cross-border capital flows in the euro area increased dramatically over time.
  - Claims on periphery countries (all sectors) and claims by the banking sector rose substantially.
  - Liabilities of periphery countries to core countries increased (all sectors and banking sector), with the share of periphery liabilities to core continuing to increase, suggesting larger outflows to outside the EA.
  - Cross-Border Euro Claims by Euro Area Banks show assets and liabilities time series in trillions of US dollars.
  - Euro Area Net Private Inflows (percent of GDP): net creditor inflows and net debtor inflows contributed to total net private capital inflows; creditor countries defined as Austria, Belgium, Germany, Luxembourg, Malta, and Netherlands.

### Credit to the private non-financial sector (Appendix Figure 3)
- Observations:
  - Credit growth diverged across countries, with some countries experiencing a surge after euro introduction.
  - Divergence particularly large between Germany and high-amplitude countries.
  - Divergence reflected in growth of credit to households and credit to firms.
  - Housing price inflation diverged: housing prices increased most for countries with large financial cycles, while housing prices picked up in Germany in recent years.
- Time series and indices shown (sources: BIS; GDP-weighted averages; index 1995=100).

### Credit growth and current account balances (Appendix Figure 4)
- Observations:
  - Credit fueled housing bubbles.
  - Real interest rates were highly correlated with inflation during the 1999-2007 boom period (R² = 0.9649 for Real Interest Rates and Inflation, 1999-2007).
  - Credit growth was higher where real interest rates were lower (R² = 0.7754 for Real Interest Rates and Credit Growth, 1999-2007).
  - Higher credit growth correlated with larger current account deterioration/larger capital inflows (R² = 0.7786 for Credit Growth and Current Account Balance Change, 1999-2007).

### Structural reform convergence (Appendix Figure 5)
- Observations:
  - Barriers to competition in services were reduced.
  - Administrative burden on start-ups was lowered.
  - Sectoral composition of periphery credit to households and non-financial corporations displayed by sector (Industry and agriculture; Consumption and services; Housing, real estate, construction).

*Source: wp1810 - Appendix Table 3: Concordance of Business Cycles, 2007q2-2015q1 (IMF staff tables and figures as provided).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1810.pdf_