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Real capital market integration in the EU: How far has it gone? What will the effect of the euro be?

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  • Georges de Ménil

Abstract

Summary Real capital market integration How far has integration gone? What euro effect?Much effort has been devoted to the study of financial market integration in Europe. Little is known, however, about real capital market integration – the degree to which plants and equipment move to take advantage of locally high returns. This paper looks at the evidence. An analysis of flows of foreign direct investment in Europe shows that integration was quite limited in the early 1980s, but has increased considerably since then. Another analysis looks at rates of return of a large number of firms. It reveals that country-specific factors play a significant role in explaining corporate returns, even after taking risk into account. This finding is incompatible with the CAPM definition of market integration. The view that integration is limited in Europe is further strengthened when the same approach is carried out for the USA and Canada. Part of the national specificity appears to be related to labour and goods market regulations, which harm firms profitability. If, by introducing more transparency and eliminating currency risk, EMU strengthens competition on the real capital market, one obvious economic benefit will be a more rational and efficient use of capital, but the most important potential consequences are political. Special-interest regulations of an exclusively national nature will not survive. They will either fall in a wave of internationalist liberalization, or become embedded in ‘harmonized’ regulations at the federal level. A reduction in excessive regulatory burdens, notably in the labour market, could lead to substantial and shared productivity gains.— Georges de Ménil

Suggested Citation

  • Georges de Ménil, 1999. "Real capital market integration in the EU: How far has it gone? What will the effect of the euro be?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 14(28), pages 166-201.
  • Handle: RePEc:oup:ecpoli:v:14:y:1999:i:28:p:166-201.
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    File URL: http://hdl.handle.net/10.1111/1468-0327.00047
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    Cited by:

    1. He, Qing & Korhonen, Iikka & Guo, Junjie & Liu, Fangge, 2016. "The geographic distribution of international currencies and RMB internationalization," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 442-458.
    2. repec:zbw:bofitp:2015_020 is not listed on IDEAS
    3. Azariadis, Costas & Pissarides, Christopher A., 2007. "Unemployment dynamics with international capital mobility," European Economic Review, Elsevier, vol. 51(1), pages 27-48, January.
    4. repec:bof:bofitp:urn:nbn:fi:bof-201506101281 is not listed on IDEAS
    5. Grahame F Thompson, 2005. "Is the Future ‘Regional’ for Global Standards?," Environment and Planning A, , vol. 37(11), pages 2053-2071, November.
    6. Yamamoto, Kazuhiro, 2008. "Location of industry, market size, and imperfect international capital mobility," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 518-532, September.
    7. He, Qing & Korhonen, Iikka & Guo, Junjie & Liu, Fangge, 2016. "The geographic distribution of international currencies and RMB internationalization," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 442-458.
    8. Osinubi, T. S. & Amaghionyeodiwe, L. A, 2009. "Foreign Direct Investment and Exchange Rate Volatility in Nigeria," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(2).
    9. repec:zbw:bofitp:urn:nbn:fi:bof-201506101281 is not listed on IDEAS

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