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Ladies and Gentlemen,
I am very pleased to open this conference on the euro and the evolution of Europe’s financial market.
In the past, one might have been forgiven for asking why we have gathered in New York – the pre-eminent US financial centre – to discuss developments several thousand miles away. Today, this is not surprising at all. We live in an increasingly globalised environment. And, nowhere is this more evident than in the international financial system.
The scale of financial flows around the world leaves us in no doubt about the interdependencies that now exist between different economic areas and economic actors. Europe, as a whole, is the second most important financial area in the world, with substantial investment flows to and from the United States. There is an expanding presence of US institutions in Europe and vice versa.
Accordingly, the process of financial integration in Europe is important not only for Europeans. It is important for all of the participants in the international economy and particularly for those in the United States. I am delighted, therefore, that we have this opportunity to discuss Europe’s financial integration in detail over the next two days.
To help us understand the financial integration process in Europe, we will have the knowledge and expertise of many eminent speakers and panellists. These experts will focus on the many different aspects of financial integration - ranging from the contribution to economic performance, to the implications for monetary-policy transmission, to the need for efficient regulation and supervision.
My job, as opening speaker, is to set the scene for these more detailed discussions. I will do so by providing a few rather general thoughts on two related themes:
- first, how the euro has contributed to Europe’s financial integration; and;
- second, how financial integration fits into the broader process of economic reform in Europe.
The contribution of the euro to financial integration
I will begin by considering the contribution of the euro to the process of financial integration in Europe.
Prior to the euro, the process of financial integration had been underway for nearly half a century. But despite some progress, a single market in financial services remained an aspiration rather than a reality. Instead, Europe had a collection of national markets, which operated in many different national currencies.
In a modern financial system – where trading is high frequency and profit margins are narrow – the level of activity is highly sensitive to cost. Until January 1999, the exchange-rate risk associated with the use of multiple currencies in Europe imposed additional costs on cross-border financial activity. These additional costs made cross-border activity unattractive and effectively put a brake on the financial integration process.
The euro has eliminated this exchange-rate risk for the bulk of cross-border financial flows within Europe. In the new single-currency environment, costs are lower and the demand for cross-border services has increased. In this way, the euro has already contributed directly to a more integrated EU financial system.
However, the euro has also made an important indirect contribution to financial integration – by highlighting the opportunity costs of the remaining sources of market segmentation. Some of these relate to cultural preferences and language, and may never be fully overcome. Others, which relate to national differences in regulation, legal frameworks, tax systems etc, are clearly more tractable. This type of barrier to integration has received renewed attention from policymakers since the launch of the euro.
The most tangible evidence of this new political focus on financial integration has been the Financial Services Action Plan. This Action Plan was adopted in 1999 and is the blueprint for creating a common regulatory framework for Europe’s financial market. The Plan comprises 42 separate measures targeted at a wide range of financial activities. These measures relate to both wholesale and retail levels and to various financial-sector functions. For example, the Action Plan includes measures to:
- improve the inter-operability of national clearing and settlement systems;
- establish common rules for integrated securities and derivatives markets;
- facilitate the raising of capital on an EU-wide basis;
- ensure legal certainty in the cross-border use of collateral;
- set common standards for financial reporting;
- promote investor confidence and market integrity; and
- facilitate cross-border retail payments.
The vast majority of the original measures contained in the Plan have been adopted at EU level. Now, they must be transposed in the national legislation of the Member States. Work is underway on the remaining measures - as well as some additional measures which were added after 1999 following the terrorist attacks of 11 September 2001 and the uncovering of major corporate scandals. In sum, implementation of the FSAP has been a technical and political success – following on from the technical success of introducing the euro.
So where are we now, with implementation of the FSAP well advanced and more than six years after the introduction of the euro? The evidence clearly suggests that the EU financial system is becoming more integrated. However, integration is progressing unevenly across financial sectors. It is stronger in the case of financial products with agreed definitions, common conventions and common infrastructure. The most dramatic example is the unsecured money markets, which became immediately and fully integrated with the launch of the euro.
Progress in integration has been slower in EU securities markets. Some of these markets are still highly fragmented due to differences in national practices, taxation, and legal frameworks. Similar problems apply in the context of cross-border consolidation of financial intermediaries and infrastructure. The FSAP has gone a long way toward addressing these problems. But the remaining sources of fragmentation must be addressed in the coming years if a single financial market is to be delivered.
Looking forward to the period after implementation of the Action Plan, the Commission has engaged in an extensive public consultation process on the next steps. The outcome of this consultation will be a re-focused strategy, which favours consolidation of existing measures over a new broad legislative programme. The objective will be to allow the financial sector enough time to digest the major reforms already introduced. The watchwords will be implementation and enforcement – making sure that European law is evenly implemented across the EU, as well as monitoring its enforcement. The economic impact of regulation will also be carefully examined. However, this new and more measured approach to regulation will in no way imply a weakening of Europe’s commitment to financial integration.
Before moving to my second theme, I would briefly mention the external dimension of the financial integration process. A single market for financial services in Europe cannot be created in isolation from the rest of the international financial system. The inter-dependencies between various economic areas and actors – to which I referred earlier – would make nonsense of such an approach. This is why the Commission is strongly committed to deepening the dialogue we have started with the United States in the area of financial services. Evidence suggests that this transatlantic dialogue is already bearing fruit and it is hoped to extend this type of dialogue to other trading partners as well.
Financial integration and economic reform in Europe
I will now turn to the second theme of my remarks - how efforts to promote financial integration fit into the ongoing process of economic reform in Europe. Indeed, an integrated and efficient financial sector is crucial for increasing the growth potential of the EU economy.
The economic motivation for financial integration reflects a two-step rationale. In the first step, financial integration is expected to promote financial development. In the second step, improvements in financial development should result in higher output potential in the real economy. The channels through which financial integration is expected to feed through to performance of the real economy are:
- a more efficient financial sector through the elimination of deadweight costs, exploitation of economies of scale, lower transaction costs, wider opportunities for risk sharing and increased competition;
- a lower user cost of capital and higher returns to saving, resulting in a better allocation of resources in the real economy.
The overall outcome is a more productive use of capital and higher rates of investment - yielding a higher output potential in the economy.
Within the EU, financial structures are generally efficient at the national level but their combination may not necessarily be. So, fragmentation remains the major source of inefficiency. Several years ago, the Commission published two complementary studies on the likely impact of financial integration on the EU economy. Though using very different methodological approaches, both studies concluded that financial integration would bring substantial and durable benefits. One study found that fully integrated securities markets could – in the medium to long term - bring about a rise in the level of GDP of 1.1% in the long run and a rise of 0.5% in the level of employment. The second study concluded that growth in value-added in EU manufacturing would increase by 0.75–0.94% per annum, if EU companies had the same access to finance as US companies.
On this basis, the European economy – and by extension the people of Europe – have much to gain from financial integration. Not surprisingly, therefore, financial integration is a key element of the EU strategy for economic reform. As some of you will know, this strategy has established ambitious targets for boosting the performance of the EU economy. The strategy – which was recently re-launched by the Heads of State and Government – focuses on three main objectives. These are:
- making the European Union a more attractive place to invest and work;
- enhancing the contribution of knowledge and innovation to growth in the EU economy; and
- creating more and better jobs.
The process of creating a single market for financial services falls under the first of these objectives and I have already referred to the link between financial-sector efficiency and overall economic performance. However, financial integration clearly contributes to the achievement of the other two objectives also – by providing appropriate financing opportunities to new and innovative businesses, and by helping to lay the economic basis for sustained employment creation.
The EU’s strategy for economic reform is now firmly focused on boosting growth and employment creation. The strategy is comprehensive and covers a range of areas in which improvements are to be made – from increasing investment in R&D, to modernising social protection system, to expanding physical infrastructure. Nevertheless, it is clear to me that the creation of a single market in financial services is of paramount importance in safeguarding the future prosperity of Europe.
Conclusion
In conclusion, therefore I would recall that the euro has contributed both directly and indirectly to the process of financial integration in Europe. The immense technical and political challenge of introducing the euro has now been followed by an equivalent challenge in creating a single market in financial services. Considerable progress has already been made – helped by the impact of the euro and by implementation of the Financial Services Action Plan. However, the challenge is far from overcome. The next stage of the integration process – which will largely focus on proper implementation and enforcement of existing regulations - will be just as important as the last.
In addressing the challenge of financial integration, EU policymakers are conscious of the fact that integration cannot be an end in itself. The objective is to raise the performance of the EU economy and, in so doing, the living standards of the people. For this reason, the financial integration process should not be seen in isolation. Instead, it is an integral part of an effort to implement broader economic reform. And, the success of this broader reform effort will depend crucially on a successful completion of the single market for financial services.
Thank you for your attention.
