Europe's Rebalancing Act
Never mind that Europe's leaders haven't done nearly enough to ensure the viability of the euro. Judging from the flows of money across the region's borders, people are regaining faith that the currency union will hold together.
Back in the darkest days of the European financial crisis, hundreds of billions of euros flooded out of Greece, Italy, Portugal and Spain. People and businesses shifted their money to the relative safety of countries such as Finland, Germany and the Netherlands, fearing that the strapped peripheral countries might be forced to dump the common currency, leaving their banks' depositors holding devalued drachma, lira, escudos or pesetas.
Much has changed since then. The European Central Bank's 2012 promise to do "whatever it takes" to defend the euro has had a lasting impact, helping governments' borrowing costs fall to extreme lows. Euro-area nations have agreed -- to a limited extent -- to stand behind one another's banks. Governments have made progress, at great cost to their economies, toward getting their debts under control.
As a result, Europeans are feeling more comfortable about putting their money in the former danger zones. The shift in sentiment is visible in the individual countries' central-bank balance sheets, changes that offer a rough indication of how much money is moving and in what direction.
The data suggest that since July 2012, when ECB President Mario Draghi made his "whatever it takes" comment, more than 400 billion euros have flowed back into Greece, Italy, Portugal and Spain, with a similar amount flowing out of Finland, Germany and the Netherlands. That's more than half the amount that flowed in the other direction over the previous three years.
Charting the six-month cumulative flows in and out of the core and periphery countries illustrates the magnitude of the reversal:
Compared with the size of the local economies, the inflows are particularly significant for Greece and Spain:
None of this means that the countries' economies are doing well or that the euro's flaws have been addressed. Banks don't appear to be putting the money to use: Total lending to nonfinancial businesses keeps shrinking.
More important, European leaders have yet to agree to the kind of deeper fiscal integration and pooling of risks that would allow countries with very different economies to share a currency -- reforms that are becoming increasingly unlikely given growing voter frustration with the European Union.
Hopefully, Europeans' renewed faith in their currency won't prove to be misplaced.
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