Financial Market Integration and Depth and the Role of the Euro

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Financial Market Integration and Depth and the Role of the Euro
Financial integration and the
international role of the euro
panel remarks by
Vítor Gaspar
European Central Bank
Washington (DC), 27 February 2004
Institute for International Economics
Euro at Five: Ready for a Global Role?
Disclaimer: Any views expressed are only the
the author’s own and do not necessarily reflect
the views of the ECB or the Eurosystem
Outline
• European financial integration
– Some concepts: financial system and integration
– Dimensions of financial integration
– Recent trends in money markets and the situation in the securities
settlement industry
– Initiative: ECB-CFS research network
• The international role of the euro
– Historical experiences with international currencies
– Economic factors at work
– Some early evidence: money markets and trade invoicing
• Conclusions
2
Some concepts
• Financial system: Set of markets and intermediaries
through which households, firms and governments channel
available savings to investment opportunities.
• The financial system performs three main functions:
– financing;
– payments and settlements;
– screening and monitoring.
3
Some concepts (cont.)
• Financial integration (negative, snapshot):
– Absence of friction that discriminates agents in their access to
financial products on the basis of their location.
• Financial integration can then be defined, more generally,
as a process leading to the removal of the relevant frictions
and obstacles.
• Financial integration (positive):
– The market for a given set of financial instruments or services is
fully integrated if all potential market participants with the same
relevant characteristics (i) face a single set of rules when they
decide to deal with those instruments and services, (ii) have equal
access to the above mentioned set of instruments or services, and
(iii) are treated equally when they are active in the market.
4
European integration more generally
• Single market program:
– 1992 etc.
• Economic and Monetary Union (EMU):
– Stage 2: removal of capital controls (1991)
– Stage 3: start of the single currency (January 1999)
– A single currency is an important component of a common
financial system and a strong promoter of financial integration, but
it is not sufficient
• Financial Services Action Plan (1999-2004):
– 42 legislative measures
– Ensure three objectives: (i) a single EU market for wholesale
financial services; (ii) open and secure retail markets; (iii) state-ofthe-art prudential rules and supervision
• What’s next? “Post-FSAP agenda”
5
Dimensions of financial integration
• Financial markets
– Money markets
– Bond markets
– Loan markets
– Equity markets
– Derivative markets
• Financial institutions
–
–
–
–
Banks
Investment companies
Mutual funds, pension funds
Insurance companies
• Related payments, clearing and settlement infrastructures
• For the remainder: focus on money markets and settlement
systems
6
Money market integration
3.5
EURIBOR and EUREPO
cross-country over withincountry rate deviations
2.0
3.0
1-month
12-month
2.5
2.0
1.8
1-month
12-month
1.6
1.5
1.4
1.2
1.0
1.0
0.8
0.6
0.5
0.4
0.2
0.0
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
0.0
Mar-02
Jun-02
Deposit market
Source: Baele et al. (forthcoming), using European Banking Federation data
Sep-02
Dec-02
Mar-03
Jun-03
Repo market
7
Money market integration
Euro-area cross-border interbank lending (stocks)
E u ro a re a b a n k s ' c ro s s -b o rd e r c la im s o n b a n k s
%
in EU R b illio n s
50
i n s i d e th e e u r o a r e a ( l h s )
1200
i n s i d e th e e u r o a r e a a s a p e r c e n ta g e o f to ta l c r o s s - b o r d e r c l a i m s
b y a l l r e p o r ti n g b a n k s ( r h s )
45
40
1000
35
800
30
25
600
20
400
15
10
200
5
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: Gaspar et al. (2003), building on Galati and Tsatsaronis (2001) and BIS data
8
Financial Integration in the Euro Area - Infrastructure
Developments in euro area payment and settlement systems
Number of settlement systems in the euro area
1997
Large-value
Payment Systems
18
• consolidation of 11 RTGS
systems into TARGET
• fewer local net systems
Securities
Settlement Systems
24
• mergers, consolidations
Retail Payment
Systems
Clearing
13
2
• no changes
•
U.S.
2003
2003
4
2
15
2
13
4
3
1
Source: ECB
9
ECB research initiatives
• ECB-CFS research network on “Capital markets and
financial integration in Europe” (http://www.eu-financialsystem.org)
• 10-11 May 2004: Symposium concluding 2 years of work
at the ECB in Frankfurt
10
Historical experiences with
international currencies
• International currency: Currency that is used to a
significant extent by residents of countries outside its home
country
• Investment and financing, trade invoicing, price
quotations, forex vehicle, forex intervention, exchange rate
pegging, reserve holding
• Relationships between those functions
• For most of the times one currency clearly dominant
• But not alone, often several other international currencies,
e.g. with more regional roles
• Transitions from one dominant currency to the other
11
extremely gradual
Economic factors driving
international currencies
• Size:
– Network externalities in the use of money
– The more a medium of exchange is used, the lower the cost of
transacting, the more attractive it becomes for new users
– Tends to push towards “centralisation”, a few currencies or a
single one
• Risk:
– A currency and assets denominated in it have a price risk (e.g.
inflation risk)
– An international investor has to diversify/hedge some of this risk
– Tends to push for “multiplicity”, investments in many currencies
• Therefore a “hierarchy” of international currencies
emerges: One often dominates but it is usually not alone
12
Likely scenarios for the euro
• Role of the legacy currencies, mainly the Deutsche mark
• Sizeable external use from the start
• Based on a large domestic economy, but euro area
financial system still faces challenges in financial
integration
• Solid anchor to price stability
• Euro should start at about the level of the Deutsche mark
• Based on its attractive size and risk characteristics its use
should expand over time
• This process can be expected to be gradual
13
Some early evidence:
International money market
• In Q1 1999, money market financing in euro share more than doubled
Euro
USD
JPY
Other
International money market instruments excluding home currency issuances, currency shares (announced issues, constant
end of 1994Q1 exchange rates, in per cent of total, Q1 1994 to Q3 2003)
Source: BIS, ECB staff calculations
90
80
70
60
50
40
30
20
10
0
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
14
Share of the euro as a settlement/invoicing currency in extra euro-area exports of goods and services of
selected euro area countries
(as a % of the total)
Belgium
1)
Belgium/Luxembourg
France
Germany
Greece
Italy
Luxembourg
Portugal
Spain
1)
1)
2000
Goods
2001
2000
Services
2001
2002
2002
…
…
53.4
…
…
57.6
42.0
48.0
…
…
…
46.7
49.2
…
23.5
52.7
53.4
55.3
49.0
39.3
54.1
45.4
57.3
…
…
…
50.5
60.4
…
11.3
50.7
54.6
56.9
…
13.3
57.0
…
40.1
49.0
…
43.5
52.0
51.6
48.5
57.6
…
37.4
50.5
…
37.4
52.9
48.3
46.4
59.7
Sources: national central banks and ECB calculations.
Notes: (…) stands for "not available". Data for 2000 and 2001 include trade settled in euro and in legacy currencies. Data refer to the
use of the euro as a settlement currency, except for Germany. For Germany, data on trade in goods reflect the average value of data
collected in surveys carried out in the first and third quarters of 2002 on behalf of the Deutsche Bundesbank. Data on services for
Belgium, France, Italy and Luxembourg include travel, whereas travel is excluded for Greece, Portugal and Spain. Data for Italy
include travel only to the extent that it is covered by data on banks' settlements.
1)
Separate data for Belgium and Luxembourg were not available in 2000 and 2001.
Source: Review of the International Role of the Euro, December 2003, ECB
15
Share of the euro as a settlement/invoicing currency in extra-euro area imports of goods and services of selected
euro area countries
(as a % of the total)
Belgium
1)
Belgium/Luxembourg
France
Germany
Greece
Italy
Luxembourg
Portugal
Spain
1)
1)
2000
Goods
2001
2002
2000
Services
2001
2002
…
…
53.3
…
…
58.7
43.6
35.0
…
…
…
47.2
39.8
…
29.3
40.8
52.8
46.8
48.0
35.8
44.2
44.4
47.6
…
…
…
50.0
54.6
…
15.3
49.9
53.3
54.7
…
16.8
56.1
…
47.0
44.0
…
53.6
49.7
35.3
57.6
55.8
…
53.7
42.4
…
55.6
45.3
38.1
59.2
48.7
Sources: national central banks and ECB calculations.
Notes: (…) stands for "not available". Data for 2000 and 2001 include trade settled in euro and in legacy currencies. Data refer to the use
of the euro as a settlement currency, except for Germany. For Germany, data on trade in goods reflect the average value of data collected
in surveys carried out in the first and third quarters of 2002 on behalf of the Deutsche Bundesbank. Data on services for Belgium, France,
Italy and Luxembourg include travel, whereas travel is excluded for Greece, Portugal and Spain. Data for Italy include travel only to the
extent that it is covered by data on banks' settlements.
1)
Separate data for Belgium and Luxembourg were not available in 2000 and 2001.
Source: Review of the International Role of the Euro, December 2003, ECB
16
Share of the euro in international trade of the acceding and accession countries
(As a % of total exports/imports, in 2002)
Share of exports
invoiced/settled in
to the EU
euro
51.0
56.1
21.8
50.7
Bulgaria
Cyprus
1
Czech Republic
Estonia
2
Hungary
Latvia
Lithuania
Malta
Poland
Romania
Slovakia
Slovenia
Share of imports
invoiced/settled in
from the EU
euro
59.0
50.5
45.5
53.0
70.4
68.4
67.7
60.2
70.4
83.1
40.1
…
…
60.2
63.5
73.9
86.9
68.0
75.1
60.4
49.6
46.1
68.8
66.1
60.6
59.4
61.7
73.1
51.5
…
34.7
59.6
67.6
60.5
82.8
57.9
56.2
53.0
45.2
67.4
61.7
64.0
50.3
68.0
Sources: Compilation by the Secretariat of the Committee on Economic and Monetary Affairs of the European Parliament
(2003), based on data provided by the statistical offices of the respective countries, with the exception of Bulgaria (for
which the source is the National Bank of Bulgaria); Eurostat and IMF (DOTS).
Notes: 1 January-September 2003. 2 January-August 2003.
Source: Review of the International Role of the Euro, December 2003, ECB
17
Conclusions
• European financial integration:
– has significant benefits for risk sharing, efficiency and growth
– is progressing
– but … is far from complete
• progress needed (e.g. market infrastructure)
– the ECB has an interest in fostering it
• International role of the euro:
– the euro is already the second most important international
currency
– its role will gradually expand over time
– the ECB is neutral about it
18
References
Detken, C. and P. Hartmann (2000), The euro and international capital markets, International Finance, 3(1).
Detken, C. and P. Hartmann (2002), Features of the euro’s role in international financial markets, Economic Policy,
24.
ECB (2003), The integration of Europe’s financial markets, Monthly Bulletin, October.
ECB (2003), Review of the International Role of the Euro, December.
European Commission (1999), Implementing the framework for financial services: action plan, COM(1999)232, 11
May (and various progress reports).
Galati, G. and K. Tsatsaronis (2001), The impact of the euro on Europe’s financial markets, BIS Working Paper,
no. 100.
Gaspar, V., P. Hartmann and O. Sleijpen (eds., 2003), The Transformation of the European Financial System
(Frankfurt: European Central Bank).
Giannetti, M., L. Guiso, T. Japelli, M. Padula and M. Pagano (2002), Financial integration, corporate financing and
economic growth, European Economy, Economic Papers, no. 179.
Hartmann, P. and O. Issing (2001), The international role of the euro, Journal of Policy Modelling.
19
Hartmann, P., A. Maddaloni and S. Manganelli (2003), The euro area financial system: structure, integration and
policy initiatives, Oxford Review of Economic Policy, 19 (1): 180-213.
L. Baele, A. Ferrando, P. Hördahl, E. Krylova and C. Monnet (forthcoming), Measuring financial integration in the
euro area, forthcoming ECB Occasional Paper.
Manning, Mark J. (2003), Finance Causes Growth: Can We Be So Sure?, Contributions to Macroeconomics, 3 (1):
Article 12.
20

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