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EU Releases Annual European Financial Integration Report

by Jason Gorringe,, London

16 December 2007

The European Commission has released its European Financial Integration Report (EFIR), an annual analysis of integration of the EU financial services sector. EFIR is a new step in the monitoring of European financial integration, merging two former reports: the Financial Integration Monitor and the Single Market in Financial Services Progress Report.

Internal Market and Services Commissioner Charlie McCreevy said: "Our financial services sector is still characterised by an uneven level of integration of wholesale and retail financial markets. While integration of capital markets has progressed significantly in recent years, in retail financial services it has not yet reached its potential. The analysis has also confirmed that competition is insufficient in some segments. The good news is that the global competitiveness of the EU financial services industry has been improving. The EU equity, bond and investment fund markets have been growing stronger than their US counterparts."

The main body of the report is devoted to economic analysis of EU financial integration and of the related impacts on market structures, competition, efficiency, innovation and stability.

The Report says that financial integration has progressed although the speed and scope has not been the same across all market segments. For the wholesale segment – specifically equity markets – further integration will depend on progress in integrating securities clearing and settlement systems. As for retail markets, the lack of integration is reflected in wide price variations across Member States and low volume of direct cross-border transactions. Positive signals of increasing integration are provided by the declining trend in some retail prices and increasing use of distance selling channels.

European financial integration has changed market structures, due in part to merger and acquisition activities. The continued consolidation process has resulted in rising concentration ratios in many markets. As regards competition, available evidence suggests that consumers and SMEs would benefit from stronger competition at the EU level. New distribution channels (Internet, mobile communication) are likely to enhance contestability of retail markets.

The favourable economic conditions recently have improved efficiency indicators of EU financial institutions and markets. However, there is still significant potential for improvement: fragmentation (in particular on the retail side) or relative underdevelopment (in new Member States) prevents economies of scale and scope from materialising in a number of markets. Financial innovation has been progressing quickly, resulting in new products and practices.

The progress of financial integration has multiplied the market links between Member States and across financial sectors. The multiplication of major pan-European financial institutions and groups, the internationalisation of capital markets and the increasing ownership links resulting from the enlargement of the European Union are examples of market links with potential effects on financial stability. Whether these trends lead to more even risk distribution or contagion depends on the quality of risk management, legal framework and supervision, including the quality of cooperation across borders.

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