Financial asymmetries, risk sharing and growth in the EU

We focus on the structural features of financial systems 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) The index is highly significant in growth regressions, suggesting that financial openness, market-based financing, and equity deepening, along with a stable financial environment, are key to endurable growth; (ii) based on the transitional dynamics of the index over 2000-2019, EU economies are converging towards a clustered financial pattern; (iii) the EU financial heterogeneity has implications for the economies’ resiliency to domestic output shocks: the risk-sharing mechanism is more effective in the more market-based and stable financial environments, whereas a larger fraction of the GDP shocks remain unsmoothed in the lower financial clusters, especially in the aftermath of the global financial crisis, when the credit channel is significantly downsized.