A well-functioning Capital Markets Union will have major ramifications as it will attract institutional investors, improving the allocation of resources and strengthening the international role of the euro. Crucially, it will help reshape capital markets in Europe after Brexit. I believe that this project is essential for the Single Market, for the Economic and Monetary Union and a resilient euro, and, ultimately, for the EU’s global competitiveness. I am certain that these and other matters will be raised and discussed during the following panel of this conference. The case for a fiscal stabilisation capacity But, even if developments in European financial markets were complete, private risksharing would still be inefficiently low. This is because private investors do not yet internalise the positive macroeconomic stabilisation externalities of their portfolio choices. In this context, the other area that urgently needs addressing is enhancing the stabilisation capacity of the euro area through fiscal instruments. Moreover, the efficiency case for fiscal risk-sharing ultimately hinges on the relevance of idiosyncratic shocks and the capacity of national fiscal policy to face these shocks. The efficiency argument meets the responsibility argument in the case of fiscal liabilities stemming from inadequate Euro-wide policies, as is now the case of financial supervision and resolution. True, some evidence suggests that national business cycles have now become more synchronised. But it is clear from economic developments over the last decade that the mere sum of national fiscal buffers may not be enough to accommodate severe common shocks.

They also require soundly functioning and well-integrated financial markets capable of diversifying risks across borders and correctly pricing concentration risks. This is why, in my view, the most immediate and significant challenge facing EMU is to reinforce the integration of both banking systems and capital markets. Reinforcing the Banking Union When the euro was launched, there was actually an expectation that many banks would become truly European, providing retail services across the whole euro area. The reality is quite different. 6/11  Cross-border consolidation remains very limited and most firms and households in the euro area remain largely dependent on their domestic banking systems to maintain investment and smooth consumption profiles. Although no formal barriers to foreign banks exist, relevant distortions arise from stillsignificant specificities in banking regulations across countries. Some of the existing savings banks, government-owned banks or regional banks in the EU are protected by national legislations hampering incentives to compete or effectively sheltering them from competition. Moreover, regulation fails to fully acknowledge the benefits generally arising from geographical diversification in a single market. We also need to address the current deadlock on the third pillar of the Banking Union, the European Deposit Insurance Scheme (EDIS). Some experts argue that this third element may not be essential once we have in place a stringent resolution framework with homogeneous bail-in requirements; but in my view, it remains crucial to make EDIS a reality.