Within the last three years, the European financial landscape has undergone a rapid transformation that continues to astonish observers and market participants alike: Corporate and public euro bond markets have emerged whose issuing activities rival those of respective US dollar markets. Europe-wide indices have been firmly established. Institutional portfolios are being traded along pan-European sectoral rather than national lines. Cross-border mergers of banks and financial institutions on an unprecedented scale are drastically changing national banking landscapes as well as international financial structures and underlying all of this is the revolutionary emergence of a genuine European equity culture.
Quite naturally, not all of these developments can be attributed to the eventual arrival of European Economic and Monetary Union (EMU). Many trends have had their precursors in the continuing liberalisation and de-regulation processes of the 1990s, as manifested in the 1992 Maastricht Treaty. However, historical data makes it difficult not to account for EMU as one major factor behind many of the most recent changes.
In this paper, I will therefore argue that at least some of the above changes can best be explained by the effects of EMU. In several ways, the advent of the single currency has triggered an equilibrium shift in more than one field that would otherwise not have occurred. In order to do so, I shall first put EMU into perspective by briefly sketching its position within the wider framework of the process of European capital market integration by means of liberalisation. Second, I shall illustrate whether and to what extent the intended direct effects of EMU did in fact materialise, but also how further indirect effects go beyond these and contribute to explaining some seemingly less related developments. Last, I shall evaluate how integrated European capital markets in fact are compared to national markets, using the U.S. as a benchmark, and close with a brief discussion of potential normative implications.
Table of Contents
1. European Capital Market Integration
1.1 1987 and the Single European Act
1.2 Maastricht and Beyond
2. The Effects of EMU on Capital Markets
2.1 The Direct Effects of EMU
2.1.1 Standardisation and Price Transparency
2.1.2 Shrinking of Foreign Exchange Markets
2.1.3 Elimination of Currency Risk
2.1.4 Homogenisation of Refinancing Procedures
2.2 The Indirect Effects of EMU
2.2.1 Market-Depth and Liquidity
2.2.1a The Public Bond Market
2.2.1b The Private Bond Market
2.2.2 Market-Breadth and Diversification
2.2.3 Banking and Financial Market Institutions
3. One Market?
3.1 The Cost of Intra-European Investing
3.2 Banking Structure
3.3 Economic Barriers
3.4 Home Bias
Objectives and Core Themes
This paper examines the extent to which the European Economic and Monetary Union (EMU) has functioned as a primary catalyst for the transformation and integration of European capital markets. It explores whether the observed shifts in financial structures, such as the emergence of a genuine equity culture and increased market liquidity, can be attributed specifically to the single currency or are the result of broader liberalisation trends.
- The impact of EMU on market transparency and transaction costs.
- The evolution of public and private bond markets within the Eurozone.
- Structural changes in banking and the concentration of financial services.
- Evaluation of European market integration against the U.S. as a benchmark.
- The influence of remaining economic and institutional barriers on capital mobility.
Excerpt from the Book
1. European Capital Market Integration
The movement of the production factor capital can be considered ‘free’ if entrepreneurs are able to satisfy their needs for investment funding, and investors can offer their disposable capital, in the place or the country where conditions are most favourable to them. The integration of capital markets can be defined as the complete merging into one of the segmental, here European, markets, through a variety of measures. First of all, this would include the removal of all constraints on foreign exchange as well as of discriminatory tax regimes and other obstacles. This is the so-called “negative integration”. Since capital is highly mobile and apt to go where the returns are highest, “positive integration” will also be a necessity; that is, the integration of capital markets by means of harmonising the rules which govern their organisation and functioning: banking regulation, payment systems and similar components of the functional framework. Inherently, a substantial degree of monetary policy integration would also be implied.
Summary of Chapters
1. European Capital Market Integration: This chapter defines the theoretical framework of capital market integration and outlines the historical shift from capital controls to deregulation in the 1980s.
2. The Effects of EMU on Capital Markets: The chapter categorizes the impact of the single currency into direct effects, such as reduced informational costs, and indirect effects, including shifts in market depth and liquidity.
3. One Market?: This section evaluates the current reality of the Eurozone as a financial area, contrasting its integration level with the U.S. and identifying persistent economic and structural barriers.
Keywords
EMU, European Capital Markets, Financial Integration, Monetary Union, Market Liquidity, Capital Mobility, Eurozone, Banking Structure, Home Bias, Transaction Costs, Economic Barriers, Single Currency, Bond Markets.
Frequently Asked Questions
What is the central focus of this academic paper?
The paper investigates how the European Economic and Monetary Union has influenced the structure and integration of financial and capital markets across Europe.
What are the primary thematic areas covered?
The themes include the direct and indirect consequences of the single currency, the evolution of bond markets, banking sector shifts, and the comparison of European capital mobility with the United States.
What is the main research question or goal?
The goal is to determine if the recent transformative changes in European financial markets are specifically attributable to the EMU or part of a wider, long-term liberalisation process.
Which scientific methodology is applied?
The author uses a qualitative, analytical approach, reviewing existing economic literature and empirical data to evaluate the structural impacts of the EMU and assess current integration levels.
What is the scope of the main body of the work?
The main body systematically progresses from the historical context of capital market integration to an evaluation of direct and indirect EMU effects, concluding with a comparative analysis of remaining market barriers.
Which key terms describe the work?
Key terms include European Economic and Monetary Union, capital market integration, liquidity, transaction costs, financial market institutions, and interregional capital mobility.
How does the author characterize the 'Home Bias' effect?
The author describes it as an irrational tendency for investors to underweight foreign assets, which results in suboptimal portfolio performance and serves as an indicator of incomplete market integration.
What conclusion does the author draw regarding the Eurozone as an investment area?
The author concludes that while the Eurozone is significantly more integrated than before, it does not yet constitute a fully homogeneous investment area on par with the U.S., citing persistent structural and institutional differences.
- Quote paper
- Ulrich Machold (Author), 2001, The Effects of EMU on European Capital Markets, Munich, GRIN Verlag, https://www.grin.com/document/9449
