debt crisis, financial flows, balance of payments, IIP, European Union
The paper presents an explanation for accumulation of foreign liabilities referring to herd behavior fueled by the Common Market mechanism allowing for some role by the New Member States of 2004. Citizens of the new EU member states of 2004 started to diversify asset portfolios available within the Common Market. Residents of other EU regions observed additional outright demand for real estate, which created appreciation expectations. They took, therefore, long positions in this market. However, speculative transactions were mostly financed by imported capital from EU-creditor countries. Foreign liabilities of PIIGS countries systematically grew. The authors observe asymmetry in terms of EU-creditor engagement in this process. The real estate market in some EU regions experienced a boom from 2004 to 2008. It was started by cash holders (foreigners) and became later leverage-fuelled by residents. When external buyers disappeared from the real estate markets, the appreciation impulse for real assets associated with the foreigners vanished. Locals in found themselves in long positions in significantly inflated real assets without any chance for recovering the original cost due to deficient demand. When explaining the reasons for intra-EU financial flows authors offer EU-solidarity interpretation in the spirit of Tirole (2012). Considering mentioned the scientific problems were raised: how the pattern or scope of financial flows in the EU could be evaluated? What is the relation between creditor – debtor considering investment in real estate in PIGS countries? The aim is to present and discuss about the pattern of financial flows within the European Union (between creditor countries – Germany, France, the UK; and debtor countries – PIIGS) and to propose a mechanism for building up real assets boom. In order to reach the aim four tasks are to be solved: briefly present the milestones of financial flows liberalization in the European Union; provide methodological substantiation of empirical investigation of the intra-EU (between creditor countries – Germany, France, the UK; and debtor countries – PIIGS) financial flows; present considerations about the problem with capital flows in European Union; to analyze the situation of financial flows in creditor and debtor countries as well as to present stylized insights about creditor-debtor relationship considering investment in real estate in PIIGS countries. Research methods: empirical investigation defining variables that describe the object of investigation; BOP statistics, ECB database as well as IMF and IFS statistics was used as source of information. The authors try to observe the international investment position defined for bilateral positions between creditor (Germany, France, the UK) and debtor countries (PIGS). The restriction of analysis of financial flows pattern was made to only several of the EU countries (Germany, France and the UK, as creditors and PIGS group: Portugal, Italy, Greece, Spain). Motivation for this decision is based on the following observations, that there are only few countries that we recognize as the EU-based debtors. These are those EU-members that experienced debt-related problems. The main results of the research - offered an alternative approach to understanding a fraction of the debt created due to Common Market and European Financial Area. Analysis of situation of financial flows in creditor and debtor countries as well as stylized insights about creditor-debtor relationship considering investment in real estate in PIGS countries was provided. Alternative scenario (four steps) as an explanation of the mechanism behind the process of foreign liabilities accumulation in the EU before the debt crisis of 2009 was presented as well.