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IPS184 Celestino G. et al.

The financial behaviour of the institutional
sectors in the Euro area
Celestino Girón, Ilja Kristian KavoniusPierre Sola
European Central Bank
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Abstract
Over the first twenty years of the euro area, the member countries have shown
very different dynamics in key financial variables. This has led analysts to group
countries according to criteria that could allegedly help explain observed
commonalities in such dynamics. However, the grouping criteria have not
always been based on a sufficiently objective methodology, nor exploited the
subtleness in country differences. We propose a grouping methodology based
on an unsupervised machine learning clustering technology, Self-Organizing
Map (SOM), combined with Principal Component Analysis (PCA) to obtain
dimensionality reduction and interpretability of results. As a proof of concept,
we apply the approach to classifying euro area countries on the basis of net
lending by institutional sector. The results also enable a characterisation of the
changes experienced in the distribution of imbalances by sector in the various
countries as a result of the financial crisis in 2008.

Keywords
financial accounts; balance sheets; net lending/borrowing, sector imbalances;
principal component analysis; deep learning; self-organising maps; clustering

1. Introduction
Over the last twenty years, analysts, researchers and the specialised media
analysing economic developments in euro area countries have been grouping
them on the basis of apparent similarities that allegedly had a bearing on the
dynamics observed since the inception of the euro area, in particular after the
financial crisis of 2008. Thus, countries have been grouped on the basis of
relevant indicators, like indebtedness, leverage or housing price dynamics, or
on more subjective criteria like north-south or core-periphery countries. In
general, the grouping criteria have been ad-hoc and simple, and lacked the
necessary objectivity in their choosing.
The country external position has been one of the criteria often used,
typically distinguishing between countries that experience current account
deficits and those with surplus. However, focusing on the total country net
lending/borrowing ignores dramatic differences in the distribution of the

The views expressed in this note are those of its authors and do not necessarily reflect those
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of the ECB.
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