The current state of financial (dis)integration in the euro area

Abstract

The sovereign bond crisis which started in 2010 caused a major disruption in euro area financial markets. The rise of credit risk led banks from the “core” of the euro area to stop lending to the euro-area “periphery”. Only the huge liquidity support by the ECB through its unconventional monetary policy measures alleviated divergent financing conditions across euro area Member States. But the fragmentation of euro-area financial markets has not disappeared, and financial fragmentation still continues to divide the euro area. This is the case despite progress on the European Banking Union project and the ECB’s (conventional and unconventional) monetary policy. Against this background, this note assesses the implications and risks stemming from persistent fragmentation of euro area financial markets for the transmission of monetary policy. Secondly, it discusses some of the policy options available (to the ECB) which may reduce this fragmentation.