Abstract:
Using data from 15 European Union economies, we quantify the real e
ects of supply-side frictions due to financial disintegration of European countries since the 2008 financial crisis. We develop a spatial equilibrium model with heterogeneous countries. Financial institutions allocate capital endogenously across countries, determining the cost of capital of firms and the wealth of nations. The cost of financial disintegration is reduced access to capital for firms and a resulting fall in output. Financial disintegration can explain 22.6% of the fall in output growth in the EU countries since the crisis. We also estimate the benefits of further financial integration.
