The benefits of financial risk-sharing for the euro area One of the main reasons why financial integration is beneficial is that integrated financial markets help support constant consumption growth “in good and in bad states” of the world. 1 Consumption smoothing between countries, also known as risk-sharing, can increase welfare by hedging consumption against country-specific risks.
In theory, in a perfectly integrated world, full risk-sharing can be achieved where consumption in regions or countries grows at a constant pace and is insensitive to local fluctuations in income and wealth. Normally, high levels of risk-sharing are achieved across jurisdictions within a country, or within a federation that represents a functioning political, economic, and monetary union.