The impact of the European debt crisis on the TARGET balance of France: a comparative analysis of French and Spanish International Accounts

Abstract

This paper explains the reasons behind France's neutral TARGET balance during the peak of the European debt crisis by analysing and comparing data from the international accounts of France and Spain. TARGET imbalances started to emerge in 2008, but the years 2011-12 accelerated this phenomenon. The TARGET balances of the GIIPS countries decreased, whereas those of the core Eurozone countries increased. While being involved in one-eighth of TARGET transactions, France has kept a balance close to zero, even so in periods of financial stress. By conducting a comparative analysis of the balance of payments of France and Spain for the years 2011-12, we find that France, like Spain, was hit by capital outflows chiefly in the form of deposit flight. However, contrary to Spain, French banks sold debt securities to the rest of the world to meet their increased liquidity needs. The estimation of an alternative scenario for French banks using balance of payments identities suggests that the disposal of these assets prevented increases in France's TARGET liability.