A Capital Market Union for Europe: Why it’s Needed and How to Get There

When savers and firms invest and borrow beyond their national borders, they enjoy opportunities to diversify their portfolios and lower their funding costs, respectively. In Europe, this idea—of an integrated financial system that offers a richness of financing choice—remains an elusive goal: capital markets are far from integrated.

Our recent research finds that European finance is still sharply segmented along national lines, with savers and investors depending heavily on national banking systems. Although the landscape is dotted with many different types of investors and intermediaries, their focus is mostly domestic—“home bias” is pervasive.

 
An unlevel playing field

This is a problem because it results in an uneven playing field: the financing costs companies pay depend hugely on their country of incorporation, collateral-constrained startups find it hard to get any funding at all, and consumption is not shielded from local economic shocks.

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