The absence of an integrated euro area banking system is one such weakness. The Great Moderation – and a euro-specific misrepresentation of the type of risk that investors were exposed to when accepting to finance imbalances in other members of the monetary union – had encouraged a formidable expansion in cross-border banking activities prior to the crisis.
Yet despite an illusion of integration, the euro area still effectively consisted of multiple juxtaposed national banking systems. Large savings and investment gaps within monetary union were therefore financed mainly through short-term banking debt, creating latent vulnerability to a “sudden stop”.