In the United States, for example, around 70% of a shock to a state’s GDP is cushioned by financial markets, whereas in the euro area the share is closer to 20%. A capital markets union could significantly help to diversify and reduce risk. Of course, it would be naïve to assume that a capital markets union can be achieved without investing political capital.
The beneficial impact of higher credit depends on the extent to which credit booms contribute to a permanent financial deepening.15 It is therefore encouraging that we have new “early warning” models and considerable work on the topic (Alessi and Detken (2013),16 Alessi et. al. (2014)17 and Gregory et. al. (2014)18 presented here at the MaRs conference.