Financial integration in the euro area has strengthened since late 2022, driven by closer alignment in asset prices across countries and more cross-border activity in key markets, according to a report by the European Central Bank.
Indicators based on prices and volumes have risen to above their historical averages, alongside a sustained decline in “redenomination risk premia” — investors’ compensation for the risk that assets could be repaid in a new national currency rather than the euro, the ECB said on Thursday in its report on Financial Integration and Structure in the Euro Area.
Cross-border activity increased across market segments, supporting risk sharing between countries and resilience to shocks.
Integration has been most visible in debt markets and interbank lending, with cross-border holdings of debt securities — including sovereign bonds — rising.
Interbank lending has also become more active as “excess liquidity” has been redistributed.
Non-bank financial institutions have played a growing role in providing funding and spreading risk across borders.
Equity integration goes backwards
Equity market integration has declined since 2022, with cross-border equity investment within the euro area stagnating and intra-euro area foreign direct investment falling to historically low levels, according to the ECB report.
Households in the euro area continue to keep a large share of their savings in low-yielding deposits, while a significant portion of equity investment is channelled outside the EU.
External financing has remained subdued amid high interest rates and weak investment sentiment, while structural fragmentation continues to constrain equity market integration and the allocation of savings across borders.
The ECB linked the findings to the European Commission’s “savings and investments union”, an initiative intended to channel savings into investment through a more integrated single market for financial services.
