The European Union Crisis Responses and the Efficient Capital Markets Hypothesis

Abstract

The hypothesis that capital markets naturally function in an efficient way - possibly one of the widest accepted dogmas of contemporary liberalism - has for many years encouraged politicians and regulators in the US and in Europe to refrain from regulating too strictly or even to deregulate the financial industry. Moreover, by leaving the final responsibility of the soundness of their public finances to the individual Member States, the Efficient Capital Markets Hypothesis (ECMH) underpins the constitutional framework of the Economic and Monetary Union (EMU).The recent financial and sovereign debts crises, however, have highlighted the limits of the ECMH and the dangers for market actors, financial institutions, regulators and politicians of relying on the efficiency of financial markets without any qualification.In reaction to the financial and sovereign debts crises the European Union and its Member States have thus adopted or proposed a vast set of measures, stretching from new mechanisms of solidarity within the euro-zone to a banking union. While the overarching goal is to release the stress that financial markets continue to exercise both on the stability of the financial system and the EMU, these measures have been designed in urgency and tend to focus on specific issues. The overall vision and coherence of these measures are far from obvious. The present paper proposes to assess to what extent the European Union has learned the lessons about the ECMH and its impact on regulation that the crises taught us.