The Impact of the Euro's Introduction on Financial Restructuring and Capital Markets in the Euro Area

Economic Research Department Executive Director Sayuri Ito

Introduction

Two and a half years have elapsed since the introduction of Europe’s single currency in January 1999. With Greece joining in 2001， the number of euro area members now stands at twelve.

Countries participating in the euro must relinquish their authority to conduct independent monetary and foreign exchange policies. In return， they hope to attain the political goals of peace and stability， as well as economic benefits.

The economic benefits of introducing the euro include the enhancement of cross-border competition by reducing foreign exchange costs and enabling direct price comparisons in different countries. In addition， the creation of large euro-based financial markets is expected to significantly contribute to economic efficiency and productivity.

In this paper， we examine progress toward integration in the financial industry， a key element for success in currency unification. We first discuss the transformation of capital markets in the euro area， and then examine how financial institutions are meeting the challenge.

Immediately prior to the euro’s introduction， capital markets were expanding amid lower interest rates， increased M&A activity， and the hi-tech boom， while financial restructuring was also accelerating. However， after the euro’s introduction， the financial markets have remained segregated due to unresolved differences in regulation， taxation， and accounting systems. As a result， the full benefits of financial integration have yet to be enjoyed. Toward this end， sustained efforts are needed by all members to coordinate macroeconomic policies and harmonize conflicting systems.