Such a scheme would have a strong impact on trust and contribute to increased risksharing, insofar as it is designed as a fully fledged mutualised EDIS. Contributions to EDIS taking into account bank-specific risks could limit the risk of permanent crosssubsidisation and would also help deal with the sovereign-bank nexus. This would contribute to reducing the link between national governments and banks and preventing destabilising cross-border flights to safety in the event of difficulties. Moving towards a Capital Markets Union The other key initiative to increase the integration of Europe’s financial markets and to facilitate risk-sharing capacity in EMU is the Capital Markets Union project. The project aims at providing firms with the same funding opportunities, and households with the same saving opportunities, irrespective of the member state in which they are located. 7/11  However, inconsistent regulations, as well as varying market practices and industry standards across EU countries, prove to be key impediments in developing a truly pan-European capital market. As a result, country savings and investments are still highly correlated, a fact known as the Feldstein-Horioka puzzle. This correlation has subsided over time in the case of the European Union but is still sizable, which is more bewildering in the case of the currency union. A departure from perfect capital mobility has important economic implications, as it might be leading to lower aggregate investment, a higher home bias in investment decisions and a lack of portfolio diversification. The Capital Markets Union project has received a stronger push over the last few months.

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.