Introduction

The integration of euro area financial markets since the launch of the euro in 1999 has been at the centre of attention in policy debate and academic literature. This chapter complements this much-explored line of research by examining a subject that has attracted much less attention – namely, the characteristics of the euro area's external portfolio investment, and particularly the geographical allocation of the international equity portfolios held by euro area investors.

The geography of the euro area's external equity holdings is important for several reasons. First, the level of holdings in each international market is a direct determinant of the euro area's exposure to external financial shocks. Second, it is also useful to assess whether international investment provides diversification against internal risks. Third, differences in the composition of international portfolios between the euro area and other major economic blocs (e.g. the United States and Japan) may generate asymmetric responses to international financial crises or global shocks, which in turn may pose a challenge for coordinated management of the international financial system.

Our empirical work is made possible by the release of the International Monetary Fund's Coordinated Portfolio Investment Survey (CPIS). This dataset, described more in detail in section 5.2, provides a unique perspective on the geographical patterns of international portfolio holdings for most major international investors, including the entire euro area.