Fragmentation Risks Have Dialed Down On Multiple Fronts #2

While talk of fragmentation focuses largely on the euro area bond market, we take a wider perspective and consider broader economic forces that can signal intensifying stress within the euro area.

• In Fig 3 we show the total cross-border holdings of loans and debt securities in the eurozone. During the sovereign debt crisis cross-border holdings noticeably fell, raising the risk of a de facto financial balkanisation of the euro area. During this period, concerns among creditors and national regulators about exposures to foreign banks and government debt underpinned a shift towards asset onshoring inside national borders. However, the situation today is again markedly different from that era with cross-border lending surpassing pre-crisis peaks, while holdings of debt securities have stabilised.
• In Fig 4 we combine measures of trade openness (exports + imports as a % of GDP) with trade exposure (% trade concentration) by looking at the total exports and imports of four largest eurozone countries with the rest of the euro area, relative to GDP. During the debt crisis there was some evidence of regional trade deteriorating - particularly in Germany and France where total trade with the euro area fell relative to GDP - which likely reflected the weaker demand during the austerity years. Again, the situation today is markedly different with trade integration within the euro area appearing to deepen coming out of the pandemic, further suggesting that economic and financial fragmentation risks have materially fallen.