Completing the single market in capital

In a monetary union the creation of a single market in capital is not only beneficial, but essential. And what matters is not the intensity but the quality of capital market integration. After the launch of the euro, we saw substantial price convergence in the euro area, only to be faced with a sudden fragmentation of financial markets when the region was hit by the crisis. The crisis made clear: convergence is a welcome process, but it does not in itself guarantee deep and resilient financial integration. The latter can be only achieved through the creation of a genuine capital market union. In the context of monetary union, there are two objectives of a single market in capital. The first is to improve what economists call allocation – that is, credit is allocated efficiently and without reference to location. The second is to improve diversification – that is, financial markets are integrated in such a way as to help companies and households cushion local shocks. In this sense, it is complementary to the single market in goods and services, which also raises allocative efficiency and may make local shocks less likely through trade integration. Ultimately, however, the sustainability of financial integration also depends on fiscal and economic integration as well. One cause of resource misallocation before the crisis was closed product and services markets that generated excessive rents and distorted price signals. In addition, the collapse of cross-border lending during the crisis was aggravated by the diverging fiscal positions of sovereigns. Hence, a single market in capital requires not just a banking union and a capital markets union, but a stronger coordination of fiscal and structural policies as well