Euro area financial integration improves, equity lags
The European Central Bank's latest report shows euro area financial integration has improved since late 2022. However, equity market integration is declining, hindering long-term growth and competitiveness.
Cross-border activity strengthens resilience
Euro area financial integration has markedly improved since late 2022, with price-based and quantity-based indicators rising above historical averages.
This progress is underpinned by a sustained decline in redenomination risk premia and supported by EU-level policy initiatives like Next Generation EU.
Cross-border activity has increased across market segments, fostering greater risk sharing and enhancing the resilience of the euro area financial system.
Debt markets and interbank lending show the most visible strengthening, with increased cross-border holdings of debt securities, including sovereign bonds.
Interbank lending has become more active due to redistributed excess liquidity, indicating a more integrated money market.
Non-bank financial institutions also play a growing role, diversifying financing channels and boosting cross-border risk sharing.
These developments suggest the euro area is more resilient to economic shocks, facilitating smoother adjustments across member countries.
Equity markets lag, hindering growth
The euro area's financial system continues to fall short of its potential to support long-term growth, innovation, and competitiveness.
External financing remains subdued due to high interest rates and weak investment sentiment.
Equity market integration has declined since 2022, with cross-border equity investment stagnating and intra-euro area foreign direct investment at historically low levels.
This persistent home bias, where households hold savings in low-yielding deposits and much equity investment is channeled outside the EU, creates a mismatch between high savings and investment needs.
This limits risk capital for innovative firms and weighs on long-term competitiveness.
The report stresses that advancing integration and efficiency across the single market is crucial to enhance the financial sector's competitiveness and support the European Commission's savings and investments union.
Integration's two speeds
While overall financial integration shows positive trends, the persistent stagnation in equity markets is a critical drag on the euro area's economic potential.
The report highlights a fundamental mismatch between abundant savings and the lack of risk capital for innovation, a long-standing structural weakness.
Without targeted policy action to address equity market fragmentation, gains in other areas of financial integration will remain incomplete and insufficient for dynamic growth.