Capital Flight: Southern European Money Migrating North to Safety

Published on Spiegel Online International, by David Böcking, Maria Marquart and Stefan Kaiser, February 29, 2012.

More and more people in southern euro-zone countries are moving their money north amid fears of losing their savings in the crisis. The capital flight makes things difficult for banks back home, but experts say there are no legal measures to stop it. Any steps would probably come too late, they say, and might even endanger the European project … //  

… The graphic shows that capital flight from Greece began in earnest in the early part of 2010, almost at the same time that the first European Union bailout package for the country was passed. Flight from Portugal began just a short time later, as investors began fearing that the country was next in line.

Protecting Legitimate Wealth:

Particularly concerning is the fact that Italy and Spain began seeing significant capital flight in the middle of 2011. It is a tendency that continued through the end of the year despite the fact that the ECB provided European banks with massive amounts of liquidity – a step the ECB repeated on Wednesday, to the tune of €529.5 billion. But despite the first liquidity injection, deficits in Italy and Spain grew by about €40 billion each. “The flight has become stronger,” Karpowitz notes. The capital flows indicate that investors do not believe that the bailout packages will have their desired effect.

It is extremely difficult to stop the current capital flow trends. States have the most influence when it comes to money that has been moved to evade taxes. Greece, for example, recently froze three accounts in Switzerland belonging to wealthy Greek businessmen. But Finance Minister Venizelos admits that it is extremely difficult to tell legal transfers from illegal ones.

Indeed, much of the capital flight seems to involve savings that have already been taxed according to law and belong to people simply trying to protect their wealth should their country decide or be forced to exit the euro zone. If that were to happen, savings would likely automatically revert to the country’s new currency and thereby lose a significant amount of their value.

“Wealthy Greeks and Italians have been investing money abroad for a long time,” says banking expert Martin Faust from the Frankfurt School of Finance and Management. Many of the countries at the southern periphery of the euro zone have a history of financial instability – which leads people to be wary.

Endangering the European Project:

Should countries wish to impose a general ban on moving money abroad, they would have little choice but to restrict money transfers and increase border controls to prevent cash smuggling. But that would hardly help, Faust says, explaining that “such a step would come too late.” The European debt crisis has gone on for so long, he points out, that many wealthy have already transferred their money to safety. “The effect of controls on capital traffic would be minimal,” he says.

Furthermore, such controls would be difficult to implement and limit trade within the euro zone. “It would be difficult to determine which euros were in flight and which euros were for trade,” Faust says. “One would have to exempt companies from the controls.”

There is also a more fundamental argument against introducing restrictions. It would run counter to the freedoms guaranteed by the internal European market — and that could endanger the entire political union. “It could result in there no longer being an acceptance for the European project in its entirety,” Faust says. (full text).

Link:

The Small World of Scams, on naked capitalism, by Richard Smith, MARCH 2, 2012.

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