Stronger integration will not only ensure a more efficient allocation of resources across the EU, but also enhance the shock-absorbing capacity of the financial system and the economy as a whole, thanks to increased opportunities for risk-sharing, and improved market and funding liquidity.
Research using data from the United States has demonstrated the important role played by financial markets and capital flows in absorbing the impact of idiosyncratic regional shocks. 1 The risk-sharing across regions resulting from an integrated financial system in the US has a far greater smoothing effect on regional consumption patterns than that achieved via explicit fiscal transfers through the federal government’s budget.