VoxEU Column COVID-19 EU institutions EU policies Financial Markets Financial Regulation and Banking

Financial integration and structure in EMU during the corona crisis

The coronavirus health crisis also had a strong impact on financial systems. This column discusses its effects on euro area financial integration and financial structure. It illustrates how decisive monetary, fiscal and prudential policy responses first contained and then reversed the initial sharp fragmentation in asset prices across member countries. Overall cross-border asset holdings, however, still have to recover. The emerging alignment between common monetary and fiscal measures through the adoption of the three European safety nets and the Next Generation EU recovery programme seem to have been a game-changer in this regard. The resilience of financial re-integration to potential future shocks to the Economic and Monetary Union, however, should be monitored going forward. The different phases of the pandemic also went along with sizeable shifts between different corporate financing tools and different financial intermediaries.

Financial integration and the structure of financial markets and intermediaries are two key elements for the functioning of the European Economic and Monetary Union (EMU). For example, they influence the extent to which the risks from asymmetric shocks can be shared and how the single monetary policy is transmitted across member countries. The massive economic dislocations that the coronavirus (COVID-19) pandemic caused in production, trade, investment, employment and consumption also showed in financial systems. Financial stability risks from the pandemic have been addressed elsewhere (De Guindos 2020, ECB 2021, ESRB 2021, European Commission 2021b). In this column, we look at high- and low-frequency indicators of financial integration and structure and discuss how they responded to the different phases of the pandemic and the policy measures taken. 

Financial fragmentation, re-integration and resilience

Figure 1 puts the financial integration implications of the COVID pandemic into historical perspective. The blue line indicates that overall euro area financial integration, as measured by cross-border price differentials in the most important financial markets, shows a sharp deterioration at the start of the pandemic. Episodes of price-based financial re-fragmentation are, however, not unprecedented. The one that occurred between February and April 2020 reversed substantially faster than in the case of other stress periods, notably the Great Financial Crisis and the European sovereign debt crisis. The downturn in overall cross-border asset holdings in the euro area (quantity-based integration, as shown by the yellow line), however, did not reverse yet for the latest available data. It was particularly driven by unsecured money market lending and equity holdings. While both dimensions of integration had recovered from the two previous crises, they are still at moderate levels, relatively similarly to the early years of the euro. 

Figure 1 Price-based and quantity-based composite indicators of euro area financial integration

(quarterly data, price-based indicator: Q1 1995 – Q4 2020, quantity-based indicator: Q1 1999 – Q3 2020)


Sources: ECB and ECB calculations
Notes: The price-based composite indicator aggregates ten indicators for money, bond, equity and retail banking markets, while the quantity-based composite indicator aggregates five indicators for the same market segments except retail banking. The indicators are bounded between zero (full fragmentation) and one (full integration). Increases in the indicators signal greater financial integration. From January 2018 onwards the behaviour of the price-based indicator may have changed due to the transition from EONIA to €STR interest rates in the money market component. OMT stands for Outright Monetary Transactions. Detailed descriptions of the indicators and their input data are in the Statistical Web Annex of ECB (2020) and Hoffmann et al. (2019).

Let us look in greater detail and at a high frequency at what happened since the start of the pandemic in Europe, which we date around mid-February 2020. Figure 2 shows a high-frequency version of the price-based integration indicator (blue line), various measures of the severity of the pandemic (COVID infections, COVID-related deaths, vaccinations and lockdown stringency) and industrial production growth as a measure of economic activity (red dots) for the euro area. The vertical lines indicate selected key events and policy measures. Building on Borgioli et al. (2020), it distinguishes between three phases of the crisis, indicated by the grey and light blue shaded areas. The first captures the first infection wave, with drastic lockdowns and a severe economic downturn (mid-February to early May 2020). The second phase covers the stark economic rebound when infections had returned to low levels and member countries partly opened up again (early May to mid/late-August 2020). The third phase spans the severe return of infections in three more waves with, however, more targeted lockdowns and a more resilient economy than during the first phase (mid/late-August 2020 to end May 2021).

Figure 2 Euro area price-based financial integration, COVID-19 pandemic developments and events

(daily data, 17 February 2020 – 24 May 2021)


Sources: Price-based composite indicator and industrial production: ECB and ECB calculations; COVID-19 new cases and deaths: Bloomberg; fully vaccinated people and lockdown stringency index: Our World in Data. 
Notes: The price-based composite indicator of financial integration is a high-frequency version (daily readings) of the one by Hoffmann et al. (2019), described in Borgioli et al. (2020). The indicator is calibrated to vary between 0 and 1. The COVID-19 new cases and the COVID-19 deaths data series are measured as seven day moving averages. Industrial production growth (excluding construction) is measured as growth rate to the previous month. Lockdown stringency varies between 0 and 100 (100 = strictest) and is computed as an average of the COVID-19 stringency indexes of all euro area countries, weighted by their 2019 real GDP. PEPP stands for Pandemic Emergency Purchase Programme and SURE for Support to mitigate Unemployment Risks in an Emergency.

The figure clearly shows the sharp financial disintegration tendencies in the euro area at the beginning of the crisis. These tendencies were driven particularly by public and private bond markets, but also by equity markets and later money markets (Borgioli et al. 2020, Figures 3 and 8). The first climax of the crisis is now often described as the March 2020 ‘dash for cash’, when the demand for money-like instruments spiked at the expense of other assets (Financial Stability Board 2020). Not only did companies scramble for liquidity to ensure their viability in the context of tightening and protracted lockdowns, but also non-bank financial intermediaries came under significant stress. High asset valuations prior to the onset of the pandemic probably exacerbated the market correction towards the end of 2020Q1 (ECB 2020b, Section 2).  

The cross-country fragmentation in financial markets can be explained by the fact that the common cause of a health epidemic manifested itself quite differently in member countries (Breitenfellner and Silgoner 2020, Delatte and Guillaume 2020, Hernández de Cos 2021). This was due – inter alia – to uneven speeds of virus contagion, differences in health systems, industrial structures (balance of more versus less affected sectors) as well as, notably, differences in public debt levels and the fiscal space available to support the most affected companies and households; so fundamental factors, but also market dynamics and possible overreactions. In fact, early in the crisis, euro area vulnerable countries’ sovereign spreads relative to Germany widened not only as a consequence of the large expected fiscal costs for stabilising their economies but also as a consequence of flight to safety into German government bonds, driving their yields further into negative territory. Still, while quite persistent, sovereign spreads remained way below their peaks during the sovereign debt crisis.

The event lines in Figure 2 help us understand why this financial fragmentation stopped and reversed relatively quickly, in contrast to what happened during the Great Financial Crisis and the European sovereign debt crisis. The policy response was very fast, both at the national and the European level. Responding to low inflation outcomes and distressed financial markets, the ECB introduced a series of new monetary policy measures. National and EU supervisory authorities adopted prudential relief measures. And national fiscal authorities were quick in putting up large support programmes for companies and workers most affected by lockdowns and other social distancing measures. For a while, however, a source of uncertainty remained the time it took member countries to agree on the necessary joint European fiscal response. Yet, it still came along significantly faster than during the previous twin crises a decade before (see events 12, 17, 24 and 25 in Figure 2). (The OECD tackling coronavirus policy tracker provides comprehensive overviews of the most important policies.)

All these elements played their role in the stabilisation of the economic and financial situation. But two areas seem to have been particularly influential in breaking the fragmentation dynamics: the ECB’s early (and continued) monetary policy interventions and a few key aspects of the common European fiscal response. In an unscheduled meeting on 18 March 2020, the ECB Governing Council launched the Pandemic Emergency Purchase Programme (PEPP) (Lane 2020), which increased the total envelope of sovereign and corporate asset purchases by an initial €750 billion and allowed for a significant degree of flexibility in allocating those purchases across assets (see events 7 and 9 in Figure 2). It is very visible in Figure 2 how the aggregate financial integration indicator (blue line) immediately stopped its ‘free fall’ and reverted upwards to a large extent. Around the same time, the ECB adopted a series of other monetary policy actions, such as various types of longer-term refinancing operations at attractive rates and eased collateral standards, as well as banking supervisory measures such as capital, liquidity and operational relief and a recommendation against dividend payouts. 

Concerning the common fiscal response, the two most influential steps were the agreements on three European safety nets for jobs, workers and businesses for a total amount of €540 billion (events 12 and 17) and on the European recovery fund, later called Next Generation EU (events 24, 25, 28 and 29). These new facilities foresee the joint issuance of debt securities. They were further reinforced by the ECB freezing corporate bond ratings in its collateral framework (event 16) and augmenting the PEPP (event 26). Again, Figure 2 illustrates very clearly how some temporary re-fragmentation reversed after the European Council adopted the European safety nets on 23 April 2020 (event 17) and a re-integration trend was set in motion and decisively solidified with the Council’s agreement about the European recovery fund on 21 July 2020 (event 29). 

This experience illustrates how powerful aligned monetary and fiscal policies can be in a low interest rate environment, with large shocks and vulnerable financial markets (see also Corradin et al. 2021). It is also interesting to see in Figure 2 that the subsequent price-based financial re-integration trend in the euro area continued until the latest data, relatively undeterred by the following severe infection waves (dashed yellow and orange lines), further lockdown measures (dashed violet line) and a slow start of vaccination campaigns (event 35 versus green dashed line). The level of integration, as measured by this high-frequency indicator, is higher by now than before the COVID-19 crisis. 

How resilient is financial integration in the euro area at present? The response matters should further adverse shocks hit. Figure 3 shows four indicators of resilience based on cross-border asset holdings. While resilience has increased substantially after the European twin crises, for all indicators some type of reversal towards more liquid securities with shorter maturities is visible; starting earlier for some indicators than for others. Remarkably, in none of the indicators does the COVID crisis seem to have accelerated the pre-existing trend. And in three of the four, the trend seems to have bottomed out recently. Still, vulnerabilities today seem to be greater than a few years ago and it may be wise to take this observation into account when considering exit strategies from unprecedented fiscal and monetary policy support.

Figure 3 Indicators of the resilience of financial integration in the euro area 

(quarterly data, Q1 2008 – Q4 2020)


Sources: ECB.
Notes: The blue line shows the ratio between the total amount of equity holdings by euro area investors (all sectors) issued by residents of other euro area countries and the total amount of debt securities holdings by euro area investors (all sectors) issued by residents of other euro area countries. For both equity and debt investments, the total refers to the sum of intra-euro area cross-border and domestic asset holdings. The yellow line shows the ratio between the total amount of long-term debt (with a maturity of more than one year) issued by euro area countries and held by residents of other euro area countries and the total amount of short-term debt (with a maturity of less than one year) issued by euro area countries and held by residents of other euro area countries. The orange line shows the ratio between the total amount of intra-euro area foreign direct investment and the sum of intra-euro area foreign direct investment and intra-euro area cross-border portfolio investment. The green line shows the ratio between the total amount of intra-euro area cross-border bank lending to households and NFCs, i.e. retail bank lending, and the total amount of intra-euro area cross-border lending between Monetary and Financial Institutions, i.e. interbank lending. For more discussion on the interpretation of these indicators, see Special Feature A “Financial integration and risk sharing in a monetary union” in the 2016 ECB report on “Financial integration in Europe”.

Changes in corporate financing and the structure of financial intermediaries

Turning from the state of financial integration to the euro area financial structure, Figure 4 shows the development of non-financial corporations’ (NFCs’) external financing in terms of flows during the crisis compared to the year before. It should first be noted that the NFC sector could be regarded as the economic epicentre of the COVID pandemic, as a large part of it was shut down and went off as a producer of goods and services, of inputs for other companies and as an employer paying wages to consumers. From there the risks spread to consumers, bank lenders, and governments forced to provide massive support. 

Figure 4 External financing of euro area non-financial corporations by instrument 

(quarterly flows, € billions, 2019‑2020)


Sources: ECB (euro area accounts) and ECB calculations. 
Notes: MFI stands for Monetary and Financial Institutions. Non-MFIs include other financial institutions (OFIs) as well as insurance corporations and pension funds (ICPFs). "Other" is the difference between the total and the instruments included in the figure and includes inter-company loans and the rebalancing between non-financial and financial accounts data.

The first, perhaps surprising, observation from the figure is that total external financing during 2020 broadly held up compared with 2019. The second is that significant reallocations across instruments occurred during the pandemic. Notably, in the early phases of the crisis NFCs borrowed significantly more from banks (yellow blocks in Figure 4) and increased debt securities issuance (orange blocks; notwithstanding large yield increases), thus creating precautionary liquidity buffers and offsetting a substantial dry-up of trade credit (grey blocks). Apparently, banks let companies draw elastically on credit lines during the initial stages of the crisis, playing the valuable role of “elastic nodes” in the financial system (Shin 2021). The debt securities boom in 2020 Q2 can be explained by the ECB stepping up its corporate asset purchases, as part of the PEPP. (Higher bond and lower equity issuance were also observed in the US; see Halling et al. 2020.) The evaporation of trade credit in Q1 and Q2 (somewhat similarly to 2008 and 2009) is likely to be related to the great uncertainty about the viability of companies during lockdowns and, accordingly, trade credit recovered in the second half of 2020 after the introduction of public support schemes (including public guarantees and moratoria on insolvency rules; EBA 2020). For example, large firms may have resumed providing liquidity support to their customers or smaller corporates postponing payments due to cash constraints. 

Next, we look at the euro area financial structure from the perspective of the relative importance of different types of financial intermediaries. The stock data on assets for the overall financial sector in Figure 5 confirm the insight from the NFC liability flows in Figure 4 that, since the start of the COVID crisis, banks grew in importance by providing credit elastically (dark blue areas in the three panels) and growing their assets by €2.3 trillion. Interestingly, other financial institutions (OFIs; light blue areas) – which had grown in the years before the crisis (ECB 2020) – decreased substantially (-€1.2 trillion), predominantly on account of reductions in their unlisted share holdings. 

Figure 5 Total assets of the euro area financial sector and shares of different types of financial intermediaries

(€ trillions (left panel; both scales), ratio of assets to nominal GDP (middle panel), percentages (right panel), quarterly data, Q1 2017 - Q4 2020)


Sources: ECB.
Notes: The aggregated (non-consolidated) assets of sub-sectors include financial assets and exclude non-financial assets. Remaining other financial institutions include security and derivative dealers, financial corporations engaged in lending (such as leasing or factoring companies), specialised financial corporations (including venture capital companies, export/import financing companies or some central clearing counterparties), financial auxiliaries (including for example asset management companies, securities brokers, investment advisers, insurance brokers or exchanges) as well as captive financial institutions and money lenders (including for example financial holding companies, funding vehicles of non-financial corporations – e.g. supporting their debt securities issuance – and other entities that channel financial flows within non-financial corporations). Data on money market funds are reported separately from credit institutions only as of Q1 2006. Data on financial vehicle corporations, which are undertakings carrying out securitisation transactions, are reported separately from remaining other financial institutions as of Q4 2009.

Many other developments in euro area financial sector assets were particularly influenced by valuation effects. Once multiple interventions had calmed financial market tensions, unprecedented monetary and fiscal policies supported asset prices; and later prospects of vaccinations and the coming recovery together with companies, households and governments learning to better deal with social distancing. This brought a type of de-coupling of equity and other asset prices and the state of the business cycle (Igan et al. 2020). Money market and investment fund assets grew by a combined €0.9 trillion, predominantly on account of increased holdings and valuations of debt securities and of equity of all types. Valuation effects also drove the absolute size of total financial sector assets up (left-hand panel of Figure 5), in addition to the increased ECB asset purchases through the PEPP, although not necessarily at a faster pace than over the preceding decade. This, together with the sharp economic contraction (grey line in the left panel), pushed the ratio of total financial system assets to GDP from 7 in 2019 Q4 to 7.8 in 2020 Q4 (middle panel of Figure 5).

Authors’ note: All views expressed are those of the authors and should not be regarded as the views of the ECB or the Eurosystem.


Borgioli, S, C-W Horn, U Kochanska, P Molitor, F P Mongelli, “European financial integration during the COVID-19 crisis”, ECB Economic Bulletin 7, 12 November.

Breitenfellner, A and M Silgoner (2020), “’Viral divergence’: Heterogenous effects of the COVID-19 crisis in the euro area”, in Spezielle Kurzanalysen, Österreichische Nationalbank, Juni: 44-49.

Corradin, S, N Grimm and B Schwaab (2021), “Euro area sovereign bond risk premia during the Covid-19 pandemic”, mimeo., European Central Bank, 10 May, forthcoming ECB Working Paper.

De Guindos, L (2020), “The euro area financial sector in the pandemic crisis”, speech at the 23rd Euro Finance Week, Frankfurt am Main, 16 November.

De Guindos, L (2021), “Climate change and financial integration”, Keynote speech at the joint European Commission/ECB conference “European Financial Integration and Stability”, 27 May.

Delatte, A L and A Guillaume (2020), “Covid 19: a new challenge for the EMU”, CEPII Working Paper No. 2020-08, July.

European Banking Authority (2020), “First evidence on the use of moratoria and public guarantees in the EU banking sector”, Thematic Note EBA/Rep/2020/31, November.

European Central Bank (2020a), Financial integration and structure in the euro area, Frankfurt am Main, March.

European Central Bank (2020b), Financial stability review, Frankfurt am Main, May.

European Central Bank (2021), Financial stability review, Frankfurt am Main, May.

European Commission (2021a), “The movement of capital and the freedom of payments”, Commission Staff Working Document, SWD(2021) 68 final, 6 April.

European Commission (2021b), European financial stability and integration review, Brussels, May.

European Systemic Risk Board (2021), Prevention and management of a large number of corporate insolvencies, Frankfurt am Main, April.

Financial Stability Board (2020), Holistic review of the March market turmoil, report to the G20, 17 November.

Halling, M, J Yu, and J Zechner (2020), “How did COVID-19 affect firms’ access to public capital markets?”, Review of Corporate Finance Studies 9(3): 501-533.

Hernández de Cos, P (2020), “The European Central Bank’s monetary policy: response to the pandemic crisis and future challenges”, speech at the Universidad Autónoma de Madrid (English translation of the Spanish original), 3 March. 

Hoffmann, P, M Kremer and S Zaharia (2019), “Financial integration in Europe through the lens of composite indicators”, ECB Working Paper, No 2319, September.

Igan, D, D Kirti and S Martinez Peria (2020), “The disconnect between financial markets and the real economy”, Special Notes Series on COVID-19, International Monetary Fund, August.

Lane, P (2020), “The market stabilisation role of the pandemic emergency purchase programme”, The ECB Blog, 22 June.

Shin, H S (2021), “Central bank balance sheets and financial stability”, in Central Banks in a Shifting World, Proceedings of the 2020 virtual ECB Forum on Central Banking, European Central Bank, Frankfurt am Main, May, 295-300.

2,001 Reads