European Commissioner for Economic and Monetary
FESE (Federation of European Securities Exchanges)
Ladies and gentlemen,
It is a great pleasure to join you this evening as we celebrate 50 years since the signing of the Treaty of Rome. Over this period, the European project has changed dramatically. It began as an embryonic community of six founding Member States and has evolved into a union of twenty seven countries and almost 500 million people.
In parallel, the EU economy has emerged from the wreckage of the post-war period to become the second largest in the world. Internal trade has been key to this economic success, driven by the integration of national markets into one single EU market.
As market integration has progressed, it has brought new economic opportunities and higher living standards for EU citizens. They can travel freely and work in other Member States. They benefit from lower prices, enjoy wider choices of consumer goods and services and have many more investment and savings options.
By signing the Treaty of Rome, the six founding Member States understood the importance of internal trade to the future economic prosperity of Europe. Over the years, the "four freedoms" - the right to free movement of labour, goods, services and capital across national frontiers - have become the essence of the EU internal market.
In my remarks this evening, I will focus on just one of these freedoms. Not surprisingly – given the occasion and the audience – this is the freedom of capital movements. More generally, I will discuss the ongoing and highly symbiotic relationship between capital liberalisation, the creation of an internal market in financial services and the euro.
Liberalised capital markets and the introduction of the euro
The commitment to the freedom of capital movements was progressively achieved during the early 90s and provided the first major impetus to financial integration in the EU.
It coincided with the adoption of several EU Directives designed to create the conditions for cross-border trade in the main financial markets, notably the markets for banking services and securities. And yet, even with this impetus, progress in financial integration during the 1990s remained slow compared to integration in product markets.
One barrier to financial integration was the existence of different national currencies within the internal market. The European Monetary System, or EMS, did provide exchange rate stability to an extent. But residual currency risk – heightened by periodic realignments of exchange-rate parities – was still an important source of market fragmentation. So long as this currency risk persisted, a true internal market in financial services would be difficult to achieve.
But the liberalisation of capital movements had created a momentum which could not be stopped. Matters came to a head with the EMS crisis in 1992 and 1993. It became evident that strict exchange-rate discipline could be very difficult to maintain in an environment of liberalised capital movements if macroeconomic fundamentals were not sound. In the immediate aftermath of the crisis, European leaders faced a clear choice:
As we all know, the choice was the single currency. Free capital movements therefore helped to remove currency risks on financial flows within the euro area, indirectly promoting further financial integration.
The euro as a stimulus to financial integration
In turn, the impact of the euro on integrating financial markets has been striking. It has created the potential for large and liquid financial markets spanning 13 Member States, and soon to become 15 when Cyprus and Malta adopt the euro in 2008. It has also provided room for huge scale and scope economies among financial intermediaries.
Substantial mergers and acquisitions activity has taken place within the euro area in recent years. This is resulting in a natural concentration of companies that are getting in shape to exploit the potential created by the euro.
As the euro has driven this progress, it has also brought the opportunity costs of remaining sources of fragmentation in the financial system into sharp focus, sparking the incentive to create a pan-EU regulatory framework. The remaining regulatory, fiscal and legal barriers to financial integration have been targeted by the Commission in the Financial Services Action Plan.
As you know, consolidation of Europe’s stock exchanges has also accelerated since the introduction of the euro, although global factors have also played a role. A notable example of consolidation is the merger of the exchanges in Amsterdam, Brussels, Paris, and Lisbon in Euronext.
This is part of a more general trend, which has extended to exchanges outside the euro area, as witnessed by the more recent agreements with exchanges across the Atlantic, or across the Channel. This trend has also been facilitated by the growing importance of the euro at global level.
Indeed, the euro now plays a major role in international trade, in the global bond market and as an official reserve currency. The latest data released yesterday by the European Central Bank indicates that the euro's share in the stock of international debt securities was over 31% in December 2006.
The single currency is also strong in international loan markets. Interestingly an increasing part of such euro-denominated loans go to countries neighbouring the euro area, for which the euro plays also a role as an exchange rate anchor, supporting their economic and financial integration with the EU.
While the euro has resulted in a step improvement in financial integration overall, its impact has varied across different market segments.
Some market segments - such as the market for inter-bank deposits in euro and euro-denominated derivatives – became fully integrated almost immediately. But the pace of integration in other market segments – notably for secured transactions – has been slower. This reflects residual barriers linked to regulatory, fiscal and legal factors.
The Financial Services Action Plan should help to address many of these barriers. It was largely implemented at the EU level in 2005 and the relevant legislation is now being transposed at the national level. So, we expect further accelerated progress in integration over the coming years.
Financial integration, economic efficiency and adjustment in the euro area
The EU's commitment to the process of financial integration is clear. But it should also be clear – not least from the Treaty of Rome - that integration is not an end in itself. It is a means to foster a vibrant EU economy by promoting more productive use of capital and thereby raising output potential. Financial integration is, therefore, closely linked to the Lisbon strategy for structural reform in the EU.
The EU financial sector substantially underperforms its US counterpart in terms of productivity and value-added. This has important effects on the real economy, knocking as much as half a percentage point off productivity growth in the EU economy as a whole.
I believe that much of this underperformance can be attributed to market segmentation. While financial markets perform relatively efficiently at national level, they combine inefficiently at the EU level. Improving the fit between these various national financial markets is the objective of the financial integration process.
But the advantages of financial integration to the EU economy extend beyond efficiency effects. An integrated financial market can also help the euro-area economy to function more smoothly. It does so by providing an important channel for euro-area Member States to adjust to shocks in the absence of national exchange rates.
This financial adjustment channel is all the more important because the euro area has no central budget and only limited cross-border labour mobility to act as safety valves. So, just as the euro was required to stimulate financial integration, financial integration is required to ensure that the euro delivers its full economic benefit.
Priorities for integration
The EU has set out its priorities for furthering financial integration, bearing in mind the benefits for improving economic efficiency and providing a channel of adjustment.
As I am near the end of my allotted time, I will highlight just a few priorities that are relevant to this audience.
First, implementation of the MiFID by 1 November 2007 is essential. This Directive is a basic building block for the internal market in financial services, providing the basis for open competition across Europe. Even ahead of implementation, the MiFID's positive effects for transforming the European financial landscape are evident in changes in pricing behaviour and levels of service provision among Europe's securities exchanges.
Obviously, MiFID entails implementation costs for financial-market participants as they adjust to a new environment. But these costs should be seen as transitional. And must be assessed against the benefits - both to the financial sector and the broader economy - of more integrated and dynamic securities markets.
The Commission is monitoring implementation of the MiFID very closely and has been urging the Member States concerned to accelerate their efforts. We also encourage you in the industry, to prepare your firms for the November 1st deadline. This way you can fully exploit the potential of Mifid from the very first day.
A second priority is the need to intensify efforts to integrate the clearing and settlement industry. As you know, the Commission has been actively promoting integration since 2000, when the Giovannini Group was asked to begin its work in the field. The pace of progress since then has been steady, although not spectacular.
However, there is reason to be optimistic about the prospects for a pan-EU clearing and settlement industry. The providers of these services have made good headway in implementing the code of conduct, which they signed at the end of 2006.
By the end of this year, many of the conditions necessary for cross-border competition should be in place. These include price transparency, free market access, interoperability between infrastructures and unbundling of services. In the background, work on the ECB initiative to build Target2-Securities as a single settlement platform is underway. But we must not forget the Giovannini barriers, which must be removed to provide a truly integrated market for post-trading services.
Third, we must improve the EU framework for legislation and regulation in the financial services field. This can be done, first and foremost, by increasing the efficiency of the Lamfalussy committee structure and encouraging greater convergence among national practices.
In the autumn, the ECOFIN Council will begin discussing this matter, helped by input from both the public and private sector. Of course, the Commission will have its own views on how the framework can be improved. Based on these various inputs, I am hopeful that we can make significant progress in providing the EU with a framework for regulation that is fit for a modern and integrated financial market.
A fourth priority is to further explore the issue of hedge funds. We acknowledge that hedge funds are above all a positive force in the financial system. Not only have they become a major source of financial innovation, but by improving risk pricing and sharing, they boost efficiency and help underpin stability.
Yet they have also become associated with excessive risk taking and concern is mounting about their potentially harmful impact on financial developments. The European Commission is working together with its European and global partners to deepen our understanding of this issue.
In line with the recommendations of the Financial Stability Forum report and the conclusions reached by the Council of EU Finance Ministers in May, we encourage ongoing cooperation among financial authorities to spread good practice. It will be important that authorities maintain dialogue with a range of market participants and actors in order to assess risks to financial stability.
Finally, I would mention Solvency II among our priorities. Even though Solvency II is not directly related to the functioning of securities markets, it could have significant indirect effects via the implied changes in the investment behaviour of insurers. The Solvency II proposal will be brought forward in the coming weeks. It will propose a marked change in the capital regulatory regime for the insurance industry in Europe. The aim will be to improve risk management among insurers and to streamline the supervision of cross-border insurance groups. In this way, it will help to create the conditions for an efficient - and safe - market for insurance services across the EU.
Ladies and Gentlemen,
Let me conclude by thanking the Federation of European Securities Exchanges and Mr Jukka Ruuska for the opportunity to make these remarks. I am well aware of the Federations contribution to promoting financial integration in the EU.
This evening I have demonstrated the EU's long-established commitment to the process of financial integration. And our plans and priorities for the coming years confirm that this commitment remains as strong as ever. Of course, continued impetus from the private sector will be crucial to fulfil our ambitions and to mobilise governments where necessary.
At the same time, you and the stock exchanges know that this process of financial integration is not confined to Europe. The challenges and issues that we encounter in the EU are the same as those faced by the financial sector globally. And while we focus on overcoming the challenges in Europe, this should be done with an eye on global developments. Nevertheless, our European framework, underpinned by the single currency and strengthened by the Financial Services Action Plan, provides us with a path to progress. By putting plans into action and furthering integration, we can look forward to the future of our financial markets with great optimism.
Thank you for your attention.