Net foreign assets dynamics: the persistence and sources of shocks to net foreign assets in 12 EU countries

The net foreign assets diverge since the early 2000s among the European Union (EU) countries: is this sustainable and what causes the divergence? This paper measures the persistence and the sources of shocks to the net foreign assets of twelve EU countries between 1972 and 2015. There is evidence of external adjustment to changes in external wealth but countries with the highest persistence of shocks see their net foreign assets diverging. The expansion of gross flows leads to this divergence of net foreign assets within the eurozone, implying whilst financial integration diversifies risk, it may lead to external imbalances