The Impact of the Euro on Europe's Financial Markets

44 Pages Posted: 13 Dec 2005

See all articles by Gabriele Galati

Gabriele Galati

De Nederlandsche Bank

Kostas Tsatsaronis

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: July 2001

Abstract

This paper presents an overview of the impact of the introduction of the euro on Europe's financial structure. It analyses changes in money markets, bond markets, equity markets and foreign exchange markets. The euro's role in originating or catalysing trends has been uneven across the spectrum of financial markets. On the lender side, banks and investors in fixed income markets have become more focused on the characteristics of individual borrowers rather than the nationality of the issuer and have built up expertise to evaluate credit risk. European equity markets have also been affected by the enhanced ability of investors to build strategies with a pan-European perspective as prices increasingly reflected risk factors specific to industrial sectors rather than individual countries. On the borrower side, EMU has increased the attractiveness of market-based financing methods by allowing debt issuers to tap institutional portfolios across the euro area. Lower barriers to cross-border financial transactions have also increased the contestability of the market for financial services, be it at the wholesale or the retail level. The introduction of the euro has also highlighted the shortcomings of existing institutional structures and areas where excessive focus on narrowly defined interests may stand in the way of realising the full potential benefits from the new environment. Diverging legal and institutional infrastructures and market practices can impede further financial market development and deepening. Hence, the euro has put a premium on cooperation between national authorities and institution as a means of achieving a more harmonised financial environment. The impact of EMU on depth in foreign exchange markets has been less clear-cut, as volatility, spreads, trading volumes and liquidity appear not to have changed in a substantial way.

Keywords: international capital markets, euro, EMU, portfolio selection, money markets, bond markets

JEL Classification: G15, F32, G11, F21

Suggested Citation

Galati, Gabriele and Tsatsaronis, Konstantinos, The Impact of the Euro on Europe's Financial Markets (July 2001). BIS Working Paper No. 100. Available at SSRN: https://ssrn.com/abstract=847688 or http://dx.doi.org/10.2139/ssrn.847688

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Konstantinos Tsatsaronis

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
(41 61) 280 8082 (Phone)
(41 61) 280 9100 (Fax)

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