EU Capital Markets Union: an alluring opportunity or a blind alley?

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Fostering cross-country risk-sharing via capital markets is a central macroeconomic objective of the Capital Markets Union. Risk-sharing means that individuals, firms or public-sector authorities, located in a region or country suffering from a temporary and idiosyncratic economic shock, would be able to compensate the regional output gap (i.e., lack of aggregate demand, increasing unemployment and pressure on wages) via income arising from financial claims on the output of unaffected member states within the European Monetary Union (and within the European Union). Likewise, difficulties in access to funds for households or firms in a crisis country would be mitigated as sources in the financial markets of partner countries, unconstrained by the umbilical nexus to >their< state, might be tapped. Of course, such complete risk-sharing is not achievable, neither in a bank-based nor in a marketbased financial system. However, the CMU action plan is expected to enable European Union member states to make substantial steps in this direction. In the light of these high expectations, the question arises: Does the CMU action plan set the appropriate priorities and can it ultimately deliver, that is: Is the risk sharing potential suggested in the plan realistic? The authors of the VJH on the macro-perspective of the Capital Markets Union provide an assessment of the risk-sharing potential and derive policy recommendations for ways of improving the CMU project.