The European Central Bank's latest biennial report concludes that while financial integration in the euro area has strengthened in recent years, equity markets have not kept pace with improvements seen in debt and banking sectors. Indicators of cross-border connectivity - including lending between countries, holdings of bonds and spreads - have risen above long-term averages since 2022, the report says, driven in part by more positive market sentiment.
Overall, the report documents broad-based advances across government and corporate bond markets, banking links and selected segments of capital markets. These gains stand in contrast to developments in equities: the ECB found that cross-border investment within the bloc in share markets has fallen to historically low levels over the same period.
"Empirical evidence points to a set of interrelated structural blockages that continue to limit the effectiveness of European capital markets in supporting innovation and long-term growth," the ECB wrote. The report singles out persistent obstacles - such as fragmented supervisory frameworks, divergent tax regimes and uneven market infrastructure - as deterrents to investment across borders.
The analysis also highlights the composition of household savings in the euro area. Households retain a large portion of their wealth in bank deposits and display comparatively limited exposure to equities, the report notes, a mix that reduces the available pool of risk capital for companies seeking long-term financing.
In response, the ECB signalled support for a package of European Commission proposals intended to deepen the single market for financial services. These measures include efforts to simplify tax arrangements, reforms to pension systems and proposals aimed at strengthening EU-level oversight. The ECB described such steps as moving in the right direction, but warned that more decisive measures will likely be required to dismantle entrenched national barriers - for example, differences in corporate and securities laws that remain rooted at the national level.
The report thus frames a mixed picture: improved cross-border links in several financial segments coexist with a continuing shortfall in equity market integration. Policymakers face the dual challenge of converting recent integration gains into a more unified capital market while addressing structural, legal and behavioral impediments that still limit cross-border investment flows.
The report does not offer a timetable for when fuller equity market integration might be achieved, nor does it introduce new policy commitments beyond endorsing the direction of the Commission's proposals. It leaves open the extent and pace of further action needed to harmonize national rules and deepen financial integration across the euro area.