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This report analyses capital movements in Europe in a global context. Capital outflows from the EU as a whole declined in recent quarters and there was even a net inflow in 2015Q1, driven by both euro-area and non-euro area countries.

Some emerging countries experienced capital outflows, which are likely related to expectations about tightening monetary policies in the United States. Our econometric results confirm the importance of global factors in driving capital flows to emerging countries, but also show that FDI flows are rather insensitive in contrast to portfolio and other investment flows.

Following a period of more than two decades of large-scale foreign exchange reserve accumulation by primarily emerging-country central banks, reserves started to decline, which is a rather marked trend-change and can lead to interest rate increases in advanced countries and offset the impacts of quantitative easing policies.

At the EU’s border, Ukraine managed to attract some capital in recent months, but Russia continues to display persistent net capital outflows. We report a remarkable similarity between capital flows in central and eastern European member states and euro area periphery countries during the past twelve years.

We analyse the bilateral patterns of capital flows to Greece and Cyprus in the context of their respective crises. Intra-euro area financial integration continues to be lower than it was in the pre-crisis period.Our econometric analysis shows the dis-anchoring of EU countries’ domestic savings and investments in the pre-crisis period, which has reversed in the past six years.

While the euro-area aggregate financial cycle fluctuated rather moderately, a major divergence of domestic financial cycles can be observed within the euro area, which was very much linked to capital flows. The credit cycles for the UK, Denmark and Sweden are found to have been close to the euro-area cycle. We analyse the challenges faced by macro-prudential policy in the euro area and suggest improvements.