ABSTRACT
How have financial markets contributed to growth, adjustment and real convergence during the first decade of the euro? And have policy-makers tapped the full benefits that financial integration can bring? Two recent research conferences organized by DG ECFIN stimulated a range of papers on these topics. A selection of the papers, assembled in the present volume, underscores how wide the potential benefits of financial integration can be, provided the macro-and microeconomic policy environment is right. Most frequently, economists discuss the gains from financial integration and development
in terms of their contribution to fostering economic growth. That is certainly a key dimension. However, a second dimension is important also, especially under monetary union. This is the role of financial markets in supporting economic adjustment. Financial integration contributes to this through risk sharing and income-and consumption-smoothing. In addition, it allows catching-up economies to tap external savings on a sizeable scale, and this too has been a key feature of experience under the euro and in Member States converging towards it. The emergence of gains from financial integration, however, is far from automatic. The
United States has been a monetary union for some two centuries, but full financial integration at the retail level is in many ways a product of the past few decades. The euro area, where other adjustment mechanisms such as labour mobility and fiscal transfers are much less prominent than in the United States, cannot afford such leisurely and intermittent progress! Indeed, the Financial Services Action Plan testifies to the EU’s resolve in this regard, and the euro area economies are already benefiting strongly from ever-deeper financial integration. Moreover, economic history underscores that well-designed macro-and microeconomic
policies are crucial if financial integration is to yield its full benefits. This lesson has been most striking, perhaps, in the case of emerging market economies, which have specific vulnerabilities. But in all economies, growing and adaptive financial markets make a positive contribution only if policies are right. Financial markets enhance the gains under favourable policy frameworks; but in other circumstances they can serve rather to amplify distortions and policy weaknesses. Indeed, the interaction between official policies and financial markets offers continually
evolving lessons. In this sense, policy-makers everywhere are engaged in a learning process as they seek to influence expectations and embed stability in innovative global financial markets. This is true in terms of tapping the gains of market innovation, and it is true also in safeguarding financial stability without engendering moral hazard. So policy-makers in the euro area face challenges at various levels in realizing the full
benefits of financial integration, and these challenges are the subject of the present volume.
The first is a recognition challenge: appreciating the full importance of the role that financial markets play in the euro area. The second is the challenge of prudent policy management in the steady state of monetary union: assuring the preconditions for financial markets to help deliver sound resource allocation and economic stability. The third is a challenge specific to catching-up economies: learning the lessons from recent experience as countries approaching euro area membership navigate the rapids of nominal and real convergence. Last but not least, there is an implementation challenge: putting in place forcefully the elements of the EU’s Financial Services Action Plan, and complementing it with additional actions to address remaining barriers to full integration.
