The geography of capital allocation in the euro area

Assessing European financial integration has proved difficult because of complex financial intermediation activities carried out in some European financial centres (Ireland, Luxembourg, and the Netherlands) whose scale has grown enormously over time. We refer to these three countries as "onshore offshore financial centers" (OOFCs), since they are onshore markets within the Euro Area, while at the same time their functioning parallels in some respects that of offshore financial centers.1 They play dual roles as both hubs of investment fund intermediation and centers for securities issuance by European and global firms. In this paper, we look through both of these OOFC roles and restate the pattern of Euro Area portfolio investment positions by unwinding fund sector investments -i.e., linking them to the ultimate underlying investors - and by associating securities issuance with the ultimate parent firms. We use our resulting estimates to reassess the bilateral portfolio exposures of Euro Area countries and the extent of European financial integration. Our new estimates of the Euro Area's investments uncover three facts.