European Union member states’ vulnerabilities to external shocks have diminished over the past five years, but progress is uneven and reveals a lack of convergence among the 28 economies despite years of recovery, Scope Ratings says, noting that 16 EU member states, up from just 12 in 2013, currently have a net international investment position (NIIP) relative to GDP that is stronger than the -35% threshold which the European Commission uses as one of the headline indicators in assessing the major sources of macroeconomic imbalances.
Greece, Ireland, Cyprus, Portugal and Spain remain the EU economies with the largest negative NIIPs, though there are compensating factors in each case like improvements in current account balances and the composition of liabilities.
Netherlands, Denmark, Malta and Germany have further improved already-robust NIIPs.
Italy looks less vulnerable to external shocks than it did in 2013, while France’s net international debtor position has remained largely unchanged and lags the NIIPs of the strongest economies. The weakness in sterling against the dollar and euro in the aftermath of the 2016 referendum on EU membership has had a favorable impact on the NIIP position of the UK.
In Central and Eastern Europe, Hungary, Croatia and Bulgaria have sharply improved their NIIPs.
The NIIP relative to GDP represents the difference between an economy’s stock of external financial assets and external financial liabilities relative to its economic size. When it is significantly negative, it signals that the economy is exposed to the potential risks of a deeper crisis in periods of international financial-market volatility and capital flight.
Most of the EU economies with the biggest negative NIIP-to-GDP ratios have notably reduced their external deficits since the euro area crisis, supported by a recovery in current account balances, however, risks to external sustainability remain elevated in many of these economies.