Financial Structure and the Economic Performance of Peripheral Economies: The Case of Europe

One of the primary economic goals of the European Union, and a prerequisite for European monetary union, is economic convergence among its members. Yet the EU continues to be characterised by economic disparities between its members, a situation exacerbated by the past and projected expansion of membership. The expectation remains, however, that financial integration in Europe will help reduce these disparities. The significance of differences in financial development was noted briefly in the European Commission’s survey of research into the effects of economic and monetary union: a specific effect of monetary union on less favoured regions… is related to the underdevelopment of the financial market that often accompanies excessive public deficits and the resort to hidden taxes. One may refer to it as the crowding out of weaker local borrowers. (European Commission, 1990, p. 225) This crowding out is seen as the consequence of the more direct measures of monetary control required in countries with less developed financial markets, and of the higher incidence of local monopolies. Financial integration would benefit borrowers in these economies, it is argued, by increasing the availability of credit and reducing its price, thus contributing to a reduction in economic disparities.(This abstract was borrowed from another version of this item.)