The Making of the European Financial Periphery: The Uneven Effects of Banking Union and Capital Markets Union across the European Union

Since the US financial meltdown in 2008 that sparked a Eurozone crisis centered on European banks, the European Union has introduced a range of new initiatives to bring greater stability and in theory also shared prosperity to EU member states. Banking Union standardized bank supervision within the Eurozone, ostensibly with knock-on stability for non-Eurozone members through the inclusion of large multinational banks. Capital Markets Union is an effort to deepen and cheapen access to capital through the proliferation of funding instruments. Per the Single Market’s logic, stable banking and more and better access to finance across the EU should dampen developmental disparities. In reality, however, the underlying structural differences in Eastern vs. Western financial markets are so severe that the EU’s new regulatory structure fuels peripheral financialization. In particular, East Central Europe has very low levels of stock market capitalization, continuing high levels of foreign bank ownership in many countries, thin corporate bond markets and very little access to securitization. Market-based banking, in fact, hardly exists in the East. Unreflective of these differences, EU innovations in financial regulation exclude or marginalize large swaths of EU member states through supervisory disempowerment, decreasing autonomy of bank subsidiaries, and the continued higher price of financial resources. We find that the Single Financial Market established through Banking Union and Capital Markets Union not only threatens to reify an enduring East-West divide, but also weakens European integration because these structures incentivize Eastern members to pursue financially nationalist strategies or to seek finance outside the EU.