The reduction in cross-border financial asset holdings and regional trade across the eurozone are perhaps the most visible scars left from the global financial crisis and subsequent fallout in European sovereign debt markets. Under pressure from national regulators to reduce risk and raise capital ratios, banks and other financial institutions cut back exposure to financial assets outside of national borders, while weak demand in the euro area pushed exporters to seek out new markets beyond the currency union. This financial and economic balkanisation of the eurozone unwound over a decade of integration and fundamentally weakened the single currency.

However, there are now tentative signs of a pickup in cross-border financial asset holdings, led by an increase in lending. This could reflect the general recovery in credit lending to the economy, or an improvement in perceived risk premia across the region. In any case, this is a positive first step on the road to re-integration. We warn, however, that given the severity of the previous economic fracturing, a return to pre-crisis conditions remains a long way off.

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Source: Bloomberg, Macrobond and Variant Perception