This implied that capital accumulation was not associated with technological change and hence TFP growth. Indeed, in the catching-up economies capital flowed disproportionately into the non-tradable/services sector, which was in general experiencing significant productivity losses.2 Specifically, capital accumulation was highest in the construction and real estate sectors, closely followed by retail, transport and leisure. There seem to be two explanations why this happened. First, in some sectors the falling marginal product of capital was counterbalanced by rising profit margins, meaning that total compensation from investing in these sectors remained high.3 This was principally the result of an incomplete single market and a lack of competition – for example, in network industries such as utilities and telecommunications – which allowed  2  See European Commission, 2014, “The drivers of total factor productivity in catching-up economies”, in Quarterly Report on the Euro Area, Vol. 13, Issue 1, April 2014. 3  See European Commission, 2013, “Catching-up processes in the euro area”, in Quarterly Report on the Euro Area, Vol. 12, Issue 1, March 2013. 2  BIS central bankers’ speeches  incumbent firms to charge excessive rents and distorted price signals. The capturing of rents by firms in these sectors may have affected productivity growth not only by channelling resources away from more productive uses, but also by creating a drag on incentives to become more efficient in other sectors.
If such losses were still to erode a bank’s capital, the new EU resolution framework will ensure, first, that the costs of bank failure fall mainly on the private sector rather sovereigns, and second, that they are spread evenly across the euro area banking sector rather than concentrated in the affected countries. The relevant innovations here are the minimum requirements for bail-in before sovereign interventions, and the creation of the Single Resolution Fund for all banks that participate in the SSM. That said, in my view achieving high quality financial integration must also involve deepening capital markets in Europe, both to improve the possibilities for market-based debt and equity financing, and to provide further channels for private risk-sharing. This obviously goes beyond Banking Union and will not be straight-forward, as it concerns multiple aspects of national law. But there are practical ways in which progress could be made. To give just one example, a Securities Law Directive has not been proposed to date, although it was already recommended in the second report by the Giovannini Group more than ten years ago (in 2003).22 Managing the financial cycle Facilitating the process of resource reallocation should allow TFP convergence to resume in catching-up economies, while the structural reforms being undertaken in these economies should help ensure that efficient resource allocation lasts. However, there is still one question from the pre-crisis period that I have not addressed: how can we ensure that the  21  Giannetti, M., and S. Ongena, 2009.