Europe needs more than a Capital Markets Union : focus on the integration of euro area sovereign debt markets

With a view to establishing a Capital Markets Union (CMU), efforts to integrate (private) capital markets and private risk-sharing in the European Union are underway. However, the single (capital) market will be burdened by a perennial potential threat to sovereign bond market stability in the euro area; these markets had disintegrated during the “euro crisis“. While several reforms related to the institutional architecture of the euro area, such as major parts of the banking union, have been implemented successfully, the eminent design feature of the euro area that nourishes fragmentation and flight to safety is not sufficiently fixed: With the adoption of the euro, Member States became ‘subsidiary governments’ that were no longer capable of issuing bonds under their own exclusive monetary control. Thus, integrating euro area sovereign bond markets should be a top priority. One remedy would be to pool sovereignty via euro bonds, or, given the reluctance to embrace risk-sharing among sovereigns, to introduce synthetic euro bonds that work without debt mutualization.