European Capital Markets: Does the Euro Matter?
The Maastricht Treaty on European Union provides for the introduction of a single currency by 1 January 1999 at the latest. Although a large series of papers and conferences has been concerned with the timing and sequencing of the introduction of the new currency and with an estimate of the costs that would be incurred, few published studies have attempted to evaluate the medium-term impact of a single currency on European capital markets. The purpose of the introductory chapter is to identify the various ways through which a single currency could alter fundamentally and permanently the European capital markets. The focus win be entirely on the medium- and long-term impact. One question is being addressed: Once a single currency is in place, what is likely to change in European capital markets? To address this issue, references to a wide economic literature will be made, ranging from the theory of market microstructure to international monetary economics. The chapters which follow discuss in great depth the various channels identified in this introductory chapter.
The analysis will attempt to show how, besides an obvious fall in revenue from intra- European currencies trading, a single European currency could change fundamentally and permanently the sources of competitive advantage of financial institutions. Indeed, an analysis of the structure of the financial industry raises the question of the importance of a currency factor. For instance, the markets for pension funds and mutual funds management or the Euro-francs and Euro-guilder bond markets are quite fragmented, with domestic institutions capturing a very large market share. Although this fragmentation is explained in part by regulations and history, it could____________________