out on the main driver of the great moderation. several explanations have been proposed, among them better monetary policy ( in other words, central bankers learnt the lessons of the 1970s ) and plain good luck ( that is milder economic shocks ). a third explanation refers to structural changes, namely in economic institutions, technology, business practices – and in the financial system. against this background, i found the paper by viral acharya, jean imbs and jason sturgess very stimulating. inspired by portfolio theory, their paper concludes that the kind of financial modernisation they examine – deregulation of branching restrictions in the us – affects the efficiency of capital allocation through its effect on the volatility of output growth, rather than through its effect on the growth rate of output itself. this is so because the primary effect of branching restrictions appears – from a risk standpoint – to limit banks ’ scope for diversification ( and thus scope for investment activity as a whole ). hopefully, other researchers will follow suit and investigate further the link between structural changes in financial systems and output volatility. as an aside, i would like to add that the paper by imbs et al. might also be interesting from a totally different angle : their application of portfolio theory aims at further diversifying the finance and growth methodology. only yesterday, george von furstenberg and ulf von kalckreuth reminded us not to fall into the trap of taking well - known methodological assumptions for granted. therefore, the attempt to tackle the finance - growth nexus using “ unorthodox ” methods ( such as portfolio theory ) might serve as a promising robustness check. 3. financial market integration and modernisation in the eu 3. 1 financial market integration why is the finance - growth nexus relevant to the eu? or, put differently, why did the ecb - cfs research network decide to devote this conference to it? as we are well aware, many european countries urgently need to strengthen growth and increase employment. real gdp growth ( yoy ) in the euro area averages out at only about 2 % in the last ten years, compared with slightly more than 3 % in peter m. summers ( 2005 ) : what caused the great moderation? some cross - country evidence, in : economic review ( q3 2005 ) of the federal reserve bank of kansas city the us. the same goes for real gdp growth per person employed, which has been roughly 1 % ( yoy ) over the last

: indicators reflect a limited image of reality. moreover, they are often biased for reasons of data unavailability or non - comparability across countries. therefore, an indicator approach should rather serve as a starting point for further analyses. still, hartmann ’ s presentation demonstrated that there is a fair amount of heterogeneity in how financial systems work across european countries. this heterogeneity might in some ways create frictions in an increasingly integrated eu financial market. additionally, hartmann highlighted that eu financial markets still suffer from several shortcomings. to my mind, the most obvious are risk capital markets, which are still small and represent bottlenecks in the areas of start - up financing ( as highlighted by marco da rin and luisa farinha in this morning ’ s session ), and the limited use of securitisation, which hampers risk allocation and unnecessarily binds banks ’ capital. 4. regulation, financial systems and growth once we acknowledge that both financial integration and financial modernisation still fall short of our expectations, the essential question is : is there a need for structural reforms of the eu financial system? or will markets be able to cope with the situation on their own? indeed, much of the ongoing financial integration process has been policy - driven – for example, the introduction of the euro or the implementation of single market legislation ( fsap ). moreover, research such as that presented by alain de serres, shuji kobayakawa, torsten sløk and laura vartia underlines the fact that financial system regulation ( concerning both banking and securities markets ) has a statistically significant influence on output and productivity growth – provided that this regulation allows for stronger competition in financial markets. when it comes to financial integration, it is generally accepted that it is – in principle – a market - driven process. for the reasons mentioned earlier, however, policymakers should facilitate full financial integration ( especially of retail banking markets and payment systems ) by acting as a catalyst. that is to say, they should address the familiar obstacles – legal, regulatory, competition, tax or technical – faced by financial institutions in their cross - border activity within the eu. unlike integration, the issue of modernising financial structures does not lend itself to simple answers. think of the popular question of whether a capital - market based financial system is more efficient than one that still relies heavily on banking. the answer is inextricably intertwined with other