Deficiencies in International Financial Integration

Deficiencies in international financial integration have contributed to the recent crises in the dollar zone and in the euro zone: the expansion of cross-border capital flows has relied too much on debt instruments at the expense of equity investment. It has resulted into excessive exposure to external liquidity risk, which has in turn inflated the demand for « public » insurance, either through the accumulation of foreign exchange reserve (dollar zone) or through cross-country fiscal transfers (euro zone). Both the diversification of China's external assets and the Capital Market Union in Europe offer opportunities to enhance market-based risk sharing mechanisms relying more on cross-border ownership of equity capital.