European Capital Markets

It is this type of fragmentation that I would like to focus on in the remainder of my remarks.

Financial disintegration is particularly harmful in a currency union where deeper and more liquid financial markets should be able to compensate for the absence of other intra-regional shock absorbers, such as flexible exchange rates. Financial markets that can absorb shocks efficiently, and contribute to macroeconomic stabilisation and resilience, do not waste costly political capital. And they create more policy space in downturns, for both fiscal and monetary policy.

I am not arguing here that public risk sharing is irrelevant. But progress towards a euro area fiscal capacity with stabilising features, however desirable, will be a long journey. Better private risk sharing mechanisms can only make it more acceptable. As the US monetary union shows, both private and public risk sharing are in fact complements, not substitutes.

A true CMU could contribute to filling a substantial part of this void and help diversify and reduce risk in the euro area. Significant progress has already been made. Under the outgoing European Commission, 11 of the 13 legislative initiatives tabled under the current CMU action plan were finalised, together with most of the non-legislative actions.

But the pace with which co-legislators, and Member States in particular, have progressed on individual initiatives has been much slower. Ring-fencing and considerable differences in national legislation mean that CMU remains incomplete in many respects, while new challenges for financial integration have emerged.

The United Kingdom's departure from the EU's Single Market, in particular, will by its very nature affect the shape of Europe's future financial market architecture. A large number of banks and investment firms are in the process of establishing or expanding their euro area presence with a view to ensuring that they can continue to serve the Single Market after Brexit.

Plans submitted to the ECB indicate that this can be expected to result in a substantial relocation of activity to the euro area, in the order of over €1 trillion in bank assets, and that, at least in the short term, activity will move to a number of euro area countries, possibly resulting in the development of a multi-centric European financial system.

While the landscape may evolve further in the future, in a financial system with a number of increasingly important hubs, as opposed to one dominant hub in London, it will be more important than ever for these hubs to be able to efficiently interact with one another and to avoid differences across Member States providing opportunities for regulatory arbitrage.

So, Brexit reinforces the urgency with which we should pursue policies that address barriers to capital market integration in the EU. This discussion is also closely connected to the parallel discussion on the global role of the euro, which fundamentally depends on our ability to build deeper and more efficient financial markets.

Advancing CMU should therefore be a top priority for the new European Commission and Parliament. The ECB is a key stakeholder in this discussion, as the transmission of our single monetary policy crucially depends on the degree of financial integration in the euro area.

But we should recognise that not all of the numerous initiatives adopted under the CMU action plan will have the same impact. And some initiatives with greater potential, such as the creation of a common safe asset, will face considerable political resistance in the short term.

We should therefore choose our battles wisely when discussing policy priorities that could improve Europe's financial market architecture in the short term. So what areas should we focus on when shaping CMU in the future? In the view of the ECB, there are three high-priority areas.