Financial Union: Integration and Stability

The introduction of Europe’s single currency 20 years ago was an important milestone for the integration of financial markets in the euro area. These markets integrated significantly in the first decade after the launch of the euro, but the integration process came to an abrupt halt with the outburst of the global financial crisis. Since then, the progress of financial and economic integration has slowed down significantly, and concerns about the stability of the overall financial system returned. The weaknesses of the regulatory and supervisory architecture that came to light during the crisis led to calls for comprehensive reforms to stabilise the EU’s financial system and promote its integration. In addition tothe ad hoc measures to address the crisis, these reforms included: (i) an overhaul of the regulatory framework for financial markets and institutions; and (ii) the creation of two crucial building blocks for a genuine financial union: the banking union and the capital markets union. These reform measures were very successfully designed, and, while not fully completed yet have contributed to the stabilisation ofEurope’s financial sector. However, further efforts are now necessary to reap the full potential of a true financial union. This section presents an overview of how the financial sector and its regulation have developed over the past two decades. It starts with a literature review on financial integration and stability, followed by an overview of trends in financial integration in the euro area. The subsequent chapters elaborate on the regulatory framework established before the crisis, the weaknesses of the financial system which were unveiled by the crisis, and the subsequent policy response.