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What Difference Would a Capital Markets Union Make for Risk-Sharing in the EU?

Author

Listed:
  • Paolo D’Imperio
  • Waltraud Schelkle

Abstract

A Capital Markets Union (CMU) is the great hope of European policymakers. The plan for a CMU tries to reduce the reliance of European investors on banks and build up a market-based risk-sharing channel between member states. Our empirical analysis raises doubts that this can be achieved through the CMU as presently conceived. In line with other skeptics, we provide evidence that (i) financial flows are generally pro-cyclical; (ii) market-based risk-sharing mechanisms tend to break down for member states when they would be most needed; and (iii) even the most developed capital markets crash in a systemic financial crisis. During the Great Recession, failing market risk-sharing was replaced by the ECB through the cross-border payments system TARGET and by troika programs. We conclude that public safety nets must be robust enough to substitute for markets. The CMU is unlikely to make much difference to risk-sharing within the EU. Große Hoffnungen richten sich auf die Kapitalmarktunion (KMU) der EU. Die Pläne für eine KMU sehen vor, die Abhängigkeit europäischer Investoren von der Finanzierung durch Banken zu reduzieren und einen marktbasierten Mechanismus der Risikoteilung zwischen Mitgliedstaaten zu errichten. Unsere empirische Analyse lässt Zweifel an diesen Absichten aufkommen. Wir zeigen, wie schon andere skeptische Stimmen zuvor, dass (1) Finanzströme in der Regel prozyklisch reagieren; (2) marktbasierte Risikoteilung genau dann nicht funktioniert, wenn Mitgliedstaaten solche Mechanismen am dringlichsten benötigen; und dass (3) selbst die am weitesten entwickelten Kapitalmärkte in einer systemischen Finanzkrise zusammenbrechen. Während der großen Rezession war es die EZB, die das Versagen der Risikoteilung durch Märkte mithilfe des grenzüberschreitenden Zahlungssystems TARGET kompensierte; Troika-Programme trugen ebenfalls zur Risikoteilung bei. Unsere Schlussfolgerung lautet, dass öffentliche Versicherungsmechanismen robust genug sein müssen, um in Krisensituationen Märkte ersetzen zu können. Es ist daher unwahrscheinlich, dass durch eine KMU die Risikoteilung in der EU verbessert werden kann.

Suggested Citation

  • Paolo D’Imperio & Waltraud Schelkle, 2017. "What Difference Would a Capital Markets Union Make for Risk-Sharing in the EU?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 86(2), pages 77-88.
    • Handle: RePEc:diw:diwvjh:86-2-6
    DOI: 10.3790/vjh.86.2.77
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    More about this item

    Keywords

    Capital markets; crisis; financial integration; risk-sharing; TARGET;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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