Description
Since the 2010-12 crisis, Comparative Political Economists attribute an important role to capital flows for the north-south divide in the Eurozone. The present paper offers a critical analysis of this `finance-centric' narrative. It argues that while the narrative rightly emphasises destabilising financial factors, it provides a partly flawed account of capital flows due to its reliance on neoclassical loanable funds theory and an overemphasis of interbank flows. The paper draws on post-Keynesian monetary theory combined with an analysis of accounting relationships and empirical data to make the following points. First, the focus on the financial account as a driver of current accounts should be abandoned in favour of an analysis of gross capital flows. Second, different types of gross flows have different effects: speculative portfolio and FDI flows into asset markets are causally more relevant than interbank flows. Third, the notion of a recycling of northern surpluses in the southern periphery conceals the geography of multilateral gross financial flows. Fourth, rising spreads in the periphery during the Eurozone crisis and the outbreak of the pandemic were not triggered by balance-of-payments problems but by a reversal of gross flows into government bond markets. Taken together, speculative asset flows do contribute to the north-south divide, but a broader framework is needed that considers factors such as domestic financial cycles, austerity, and the separation of monetary and fiscal policy.
