Before 2008, it was fashionable for European institutions to exalt the virtues of financial integration. Very small yield differentials between German and Greek government bond markets were approvingly cited as evidence that the Eurozone project of financial integration was progressing at rapid speed, at least in wholesale money and securities markets. Now European institutions routinely blame financial markets for failing to notice default/credit risk in sovereign bond markets.
Yet the evolution of the repo market - where financial institutions exchange collateral for cash, with a promise to reverse that transaction at a later date - suggests that European institutions encouraged markets to disregard fundamental differences. The European Commission's 2002 Financial Collateral Directive was premised on the idea that repo integration would increase cross-border holdings of financial assets if repo market players could use these assets as repo collateral.
The ECB also got involved, through its collateral framework:
