process and progress of eu economic integration: the financial sector christoph walkner dg ecfin, e1
TRANSCRIPT
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Process and Progress of EU Economic Integration:
the Financial Sector
Christoph Walkner DG ECFIN, E1
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Outline
• EU instruments for economic policy
• The case of the financial sector
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EU economic integration: Instrument Mix
National policies Co-operation, co-ordination EU legislation, Treaty changes
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National actors’ responsibility
Employment policy Taxes Amount and composition spending Pensions
plus some co-ordination, co-operation
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Rationale for co-operation, co-ordination
Direct cross-border policy spillovers of national policies
Indirect cross-border policy spillovers, via national policy affecting inflation rate, inducing ECB to change interest rates
Avoiding free rider behaviour
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The instruments of co-operation, co-ordination
Information exchanges Best practices Policy dialogue Peer reviews Common rules, objectives and actions
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Specific co-ordination, co-operation Instruments in economic policy
BEPG (general guidance)– Cardiff process (Product and Capital markets)– Luxembourg process (Employment)– Cologne process (Macroeconomic dialogue)– Stability and Growth Pact (budgetary policies)
Lisbon objectives (March 2000)– Strategic goal: EU most competitive economy– Spring Report (economic, social, environmental
issues)– Open method of co-ordination (peer reviews)
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The rationale for EU legislation:
Multiple Nash-Equilibria Prisoners dilemma, enforcement Level playing field Easier to deal with outside world
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The instruments of EU legislation:
Non-binding Recommendations (Commission)
Regulations, Directives (Council, Parliament)
Treaty changes (exceptional)
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Example: Financial Integration
Rationale Legal instruments and progress The way ahead
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Rationale
Financial integration raises growth, as – Allocation of capital is improved– Higher efficiency of financial intermediation– More opportunities for risk-diversification– More consumer choice
This lowers capital costs
and improves productivity
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Legal instruments: Maastricht Treaty
Euro introduction– Common currency for more than 360 million
persons– Single monetary policy: ECB, Eurosystem
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EU legislation: Banking
Banking financing still dominant in EU Single Licence (1993)
– Opens EU market for all banks– Mutual recognition of home supervisory
practices– Home country control plus co-operation
between supervisory authorities– Harmonisation of laws and practices for
banking (capital requirements etc.)
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Banking integration
Still spreads between national interest rates (mortgages, consumer credit)
Two tier structure for bank liquidity:– Large banks cross-border– Smaller banks domestic
Asset management more EU oriented– Portfolios of insurance, pension funds
Consolidation, mainly along national lines
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Cross-border M&As are lagging
Depository Institutions M&As in numbers: domestic vs. cross-border
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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FSAP, 1999
42 legislative and non-legislative measures:
takeover directive market abuse directive prospectus directive ISD transparency directive (financial reporting)
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Lamfallussy framework
Problems of implementation lead to Lamfallussy four level framework:
Level 1: adoption Level 2: implementing legislation Level 3: consistent transposition Level 4: consistent enforcement
Extension of Lamfallussy framework to banking, insurance
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Money and Financial Markets I
Highly integrated: – unsecured money market (interbank lending)– Fixed income
• convergence sovereign yields• Higher issuances (public, corporates)• New products: euro denominated ABS/pan-
European Pfandbriefe• Rising outside euro area interest in market
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Money and Financial Markets II
– Derivatives• interest rate swaps• euribor based future contracts• European index trading
– Equity Markets• Investor level, less on issuers• Increasing correlation among national markets• Higher standard deviation on national markets than
euro wide
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Money and Financial Markets III
Less integrated: collateral– Foreign listing of equity, bonds– Cross-border trading of equity bonds– secured money market (repos, CP)
• Due to national regulations, contract laws and technical barriers
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Equity market consolidation
Euronext (Amsterdam, Brussels, Paris, Lisbon) plus LIFFE (London)
NOREX (Stockholm, Helsinki, Copenhagen, Oslo, Iceland)
Deutsche Bourse (Clearstream)
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Technical barriers
Clearing and Settlement (Giovannini) Payments Systems
– Target– Retail Payment systems
• Regulation on cross-border payments in euro• Banking initiative (PE-ACH)
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Next Phase
Corporate Governance Audit Reform Common Accounting Standards (IAS) Cross-border supervision Retail banking integration?
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Conclusion
• Instrument mix for economic processes
• Financial sector integration progressing, still unfinished business
• Coming policy initiatives