The euro effect: Credit contractions and cross-border banking dynamics in the EU during the 2008-2015 crisis years

In light of the 20th anniversary of the euro area (EA) as a currency union, and after its survival of both the global as well as the euro crisis that followed, the discussion among EA countries about the future of their membership is as pertinent as ever. In this thesis, I examine the relationship between EA membership and cross-border banking dynamics during the period in which both crises occurred. I explore if and, if so, how the euro aects international bank lending as well as contribute to the crisis' credit retrenchments. Using panel data on bilateral cross-border bank claims from 2008-2015, I decompose this `euro eect' into three channels of contagion: a pairwise eect, where both banks are located in euro countries; a creditor eect, if only the creditor bank is part of the euro zone; and a debtor eect, capturing EA membership of the borrowing country. I nd that mutual EA membership is negatively related to cross-border lending. Moreover, this pairwise eect is also related to credit retrenchments during the euro crisis, as I show that EA pairs contract their lending more during the crisis than any other country pair. My results do not provide strong evidence for a separate creditor or debtor channel driving these results. They highlight the area's vulnerability to the transfer of nancial shocks, stressing the importance of an integrated yet stable euro policy.