Research has found that private risk sharing through integrated capital markets is a much more important shock absorber than public risk sharing. The integrated markets for equity capital in the US cushion around 40% of total cyclical fluctuations between federal states. If a negative shock hits an industry or a specific region, then this loss is spread widely beyond that region.
Creditors, on the other hand, are not exposed to losses – except in the case of insolvency. In other words: equity is a shock absorber, debt is a shock amplifier. That’s yet another reason why we need to promote the integration of equity markets in Europe, too. This should also include venture capital.