Mutual Recognition: Integration of the Financial Sector in the European Community

By Key, Sydney J. | Federal Reserve Bulletin, September 1989 | Go to article overview

Mutual Recognition: Integration of the Financial Sector in the European Community


Key, Sydney J., Federal Reserve Bulletin


Mutual Recognition: Integration of the Financial Sector in the European Community

Since the beginning of 1988, momentum toward completion of the internal market in the European Community has increased markedly. The target date for establishing this market, which will allow the free movement of goods, persons, services, and capital within the Community, is December 31, 1992. The European Community has already taken legislative action in many important areas, including the liberalization of capital movements and the establishment of a framework for a Communitywide market for banking services. Currently, EC member states are taking steps to encourage industries to prepare for the more competitive post-1992 environment, and some governments are using the deadline to speed deregulation of their own financial markets. In the private sector, companies are developing strategic plans based on the creation of a unified European market; one result has been a wave of intra-European mergers and acquisitions.

The EC program for the financial sector is being developed and implemented at a time of increasing internationalization of financial services and markets. Technological change and innovation in instruments and services have played a major role in this process of internationalization. At the same time, market forces have both necessitated and facilitated greater international coordination with regard to supervision and regulation. This coordination has resulted in some movement toward harmonization of rules among nations (in particular, the Basle Accord on international bank capital standards) and easing of restrictive rules and practices by individual countries. Although the EC program for financial services and markets can be viewed as a part of this process of international coordination, the program is qualitatively different from what has been achieved beyond the Community. The EC approach to achieving internal financial integration is therefore of interest not only for its effect within the Community but also in relation to issues regarding international trade in financial services that are being addressed in forums such as the current Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the Organisation for Economic Co-operation and Development (OECD), and the Bank for International Settlements.

The first section of this article discusses the development of the internal market program and the Community's use of the concept of mutual recognition. The second section provides an overview of the EC program for creation of a "European Financial Area," a term used by the EC Commission, the Community's executive body, to refer both to the removal of barriers to capital movements and to the establishment of a framework for a Communitywide market for financial services. The third section presents a conceptual analysis of the EC approach of mutual recognition as a means of achieving integration of the Community's financial sector. The concluding section considers the relevance of the principle of mutual recognition in the broader international context of approaches to domestic market access for foreign firms.

DEVELOPMENT OF THE INTERNAL MARKET PROGRAM

In the early 1980s, concern was widespread within the European Community that the EC countries were recovering very slowly, compared with the United States and Japan, from the recessions of the late 1970s and were being outstripped by the United States and Japan in new high-technology industries. The conventional wisdom was that, even though tariff barriers among the member states had been dismantled more than a decade earlier, nontariff barriers and market fragmentation within the Community were major impediments to EC economic growth. Partly because of this view, in the first half of the 1980s new initiatives were proposed to reactivate the process of European integration. Perhaps the most far-reaching of these proposals was the draft treaty establishing a European Union that the European Parliament adopted in early 1984. …

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