Individual investors can safeguard themselves against local income risks by diversifying their equity and debt-financed investment across borders. As the nominal exchange rate cannot adjust in a currency union, cross-border risk sharing plays an important role in balancing asynchronous business cycles and thus in supporting the stability of the currency union.
It is therefore all the more important that capital markets function as channels for risk sharing within the European monetary union. Yet, cross-border risk sharing is constrained if the integration of capital markets is concentrated on financial instruments with payout streams that are not contingent on an enterprise’s business situation such as debt instruments. Equity investors, in contrast, directly participate in gains and losses.