International Monetary Fund staff estimates financial integration reforms could raise long-term EU GDP by about 3 percent

An International Monetary Fund Staff Discussion Note finds that persistent fragmentation and limited depth in European Union financial markets constrain firm growth, innovation and cross-country risk sharing. Model simulations indicate that reforms to deepen banking integration and venture capital markets could raise EU GDP by about 3 percent in the long term. About two-thirds of the gain would come from reducing barriers to cross-border banking, with the remainder from expanding venture capital supply and lowering barriers to cross-border risk capital. The main policy-induced obstacles include differences in banking regulation, deposit insurance and corporate insolvency regimes, as well as rules limiting pension funds’ and insurers’ provision and cross-border allocation of risk capital. The note estimates that a 30 percent reduction in bilateral banking policy differences could increase cross-border credit’s share of total lending from 5 percent to 24 percent. Financial reforms could also add 1 percentage point to the GDP gains from broader structural reforms supporting business dynamism and innovation, with smaller EU economies and younger firms benefiting disproportionately. The analysis supports advancing the banking union through a European deposit insurance scheme and more harmonized macroprudential and insolvency frameworks. It also recommends pension and insurance reforms to expand long-term risk capital, simpler withholding tax procedures, improved pension portability and measures enabling market participants to operate across EU trading venues and securities depositories, alongside safeguards for financial stability.