5. Summary
This paper has investigated whether domestic credit growth is more closely related to international capital inflows in countries that are members of the EU. The paper has shown that, more than in other emerging markets, domestic lending in the NMS depends on the development of cross-border lending. Because the fall in cross-border lending during the period of low interest rates has been of some significance, this finding is not only significant statistically, but also economically. The paper has further shown that the strong link between cross-border flows and credit growth is not a side effect of the crisis period. In fact, during the boom period a rise in cross-border lending also translated into more rapid domestic credit growth if a country was a member of the EU. I explain this finding as follows. Political integration, the corresponding adoption of EU rules and catch-up expectations made it easier for banks in the NMS to finance domestic lending using foreign credit during the 2002–2008 boom period. EU membership lowered the (perceived) risks associated with foreign borrowing and increased the dependence of domestic lending on global financial conditions compared with other emerging market countries when EU financial markets and institutions were considered sound and healthy. But there are two sides to every coin. When European financial markets started to shake and the European debt crisis revealed problems in EU institutions, this had devastating effects in the NMS. Domestic lending declined along with the fall in cross-border financing. Although the contagion effects of the euro area’s financial troubles on domestic lending in the NMS are substantial, this paper does not claim that political integration is a problem per se. However, the NMS would have been in a better situation if euro area institutions had been able to prevent the severe buildup of financial imbalances during the 2000s. In summary, the paper suggests that the EU’s economic and political institutions, such as the supervisory and regulatory framework or the established bailout institutions, will continue to have an impact on the NMS via financial integration, for good or ill. Therefore, repairing the financial sector and improving the quality of monetary and financial institutions in the core European economies is important for the EU as a whole and not just for the euro area.
