Financial development traps in European regions: Theory and evidence

Rodrigo Cuenca De Armas (), Maria Teresa Balaguer-Coll () and Emili Tortosa-Ausina
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Rodrigo Cuenca De Armas: Department of Economics, Universitat Jaume I, Castellón, Spain
Maria Teresa Balaguer-Coll: Department of Finance and Accounting, Universitat Jaume I, Castellón, Spain

No 2026/06, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: This study explores the risk of financial development traps in European regions by analysing the performance of the financial sector in terms of productivity and its relationship with GDP per capita. Using data for 226 NUTS2 regions over the period 2000–2021, we construct two original indicators adapted from Diemer et al. (2022) to a sectoral framework, capturing respectively the cyclical and structural dimensions of decoupling between financial sector dynamics and regional economic performance. The analysis reveals that a non-negligible share of European regions show signs of entrapment, with considerable heterogeneity both between and within Eastern and Western Europe. Results also point to a reduction in the share of trapped regions between the crisis period (2008–2015) and the subsequent recovery phase (2016–2021), alongside a notable inversion in the relative exposure of Eastern and Western European regions. Our findings highlight the importance of assessing the functional orientation of the financial sector (rather than its mere size or depth) and suggest that institutional and sectoral factors play a critical role in shaping regional financial resilience beyond geographic location.

Keywords: financial development; development traps; regional inequalities; productivity; employment; convergence (search for similar items in EconPapers)
JEL-codes: O16 O18 R11 R58 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2026
New Economics Papers: this item is included in nep-eec, nep-eff, nep-eur, nep-fdg, nep-geo and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2026/06

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