Financial asymmetries, risk sharing and growth in the EU

We focus on the structural and stability dimensions of financial development and build an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. We have the following results. (i) Based on the transitional dynamics of the index over 2000-2019, EU financial systems are converging towards a clustered pattern; (ii) our measure of financial development is highly significant in growth regressions, suggesting that greater openness, market-based financing, and equity positions, longer debt maturities, and enhanced stability are key to stable growth; (iii) financial asymmetries have implications for the heterogeneous vulnerability to domestic output shocks: the risk sharing mechanism is more effective in financially resilient economies that benefit by the contribution of the capital market channel, while a larger fraction of the GDP shocks remains unsmoothed in less resilient economies that feature a considerable down-seizing of the saving channel in the post-global financial crisis.