Financial stability in the Eurozone: where do we stand?

At the start of the EMU, concerns about fiscal and monetary stability dominated the academic debate. In contrast, financial stability issues were largely overlooked. Since then, more attention has been paid to the implications of the EMU for financial regulation and supervision and to the drawbacks of government involvement in the domestic financial sector, both as owner and as debtor. This paper reassesses these issues and draws the following conclusions. Firstly, little progress has been made in centralizing financial supervision in the Eurozone. Secondly, with the exception of Germany, all Eurozone countries have made substantial progress in reducing state ownership in their banking systems. Thirdly, limited progress has been made in the reduction of bank exposures to domestic public debt. A continued retreat of governments from the financial sector is desirable, leaving bank ownership to the private sector, holdings of government debt to the public, and supervision to a specialized, independent European institution.