European Union Crisis Responses and the Efficient Capital Markets Hypothesis

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 United States and Europe to refrain from regulating too strictly or even to deregulate the financial industry. Moreover, by leaving Member States with the final responsibility for the soundness of their public finances, the Efficient Capital Markets Hypothesis (ECMH) underpins the constitutional framework of the Economic and Monetary Union (EMU). The recent financial and sovereign debt 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 debt crises, the European Union and its Member States have proposed or adopted a vast set of measures, which range from new mechanisms of solidarity within the Eurozone to a banking union. While the overarching goal is to relieve 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 *2 present paper proposes to assess the extent to which the European Union has learned from the lessons taught by the crises relating to the ECMH and its impact on regulation.