Challenges for the European Capital Markets Union : reviving financial integration and safeguarding financial stability

After a period of deepening financial integration, the financial crisis triggered a fragmentation of Europe’s capital markets along national lines. Financial integration was prone to sudden stops and capital reversals because cross-border capital flows predominantly consisted of short-term debt flows. In this article, I argue that a Capital Markets Union, which aims at promoting financial integration by means of harmonization and common standards, would not be sufficient to reach its goals. In order to lessen the proneness to capital reversals, the new framework for capital markets should promote cross-border equity holdings rather that short-term debt flows. For ensuring integrated and stable capital markets, the EU needs a single capital market supervisor at the EU-level with a focus on non-bank financial investors. This supervisor should also monitor systemically important markets, like the government bond market, from which country-specific risks can spillover to other segments of the capital market.