A dysfunctional financial sector – creating unsustainable levels of debt – was at the center of the euro area’s travails. In 2007-2008, imploding money markets functioned as canaries in the coalmine. They were the precursors to financial stress that arose in the spring of 2010, first in Greece, then in Ireland, Portugal and Spain. Subsequently, in 2012, the tight – inevitable links between sovereigns and their troubled banks, proved nearly fatal for the Euro. It took European Central Bank (ECB) President Draghi’s extraordinarily forceful intervention in the summer of 2012, to draw the Economic and Monetary Union (EMU) back from the abyss.
Faced with the imminent threat of unraveling, substantial reforms of the Economic Monetary Union's (EMU) financial framework were launched. A Banking Union, i.e. the de-nationalization of banking politics, was started: Since November 2014, a single supervisor has been charged with supervising the largest euro area banks. When in trouble, they should be restructured or unwound by a single resolution board. The common deposit insurance scheme, however, is still missing. Consequently, markets are separated along national lines.
In fact, the crisis had reversed the integration of euro area financial markets. National background conditions matter. They show in a substantial dispersion of the access to as well as the cost of credit. What has been done to re-integrate? Where do we stand? Where should we go? How important is financial integration for a resilient union?