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Single financial market

Financial markets deal with the flow of capital and are vital to an open market economy because an efficient financial market provides for better use of capital. The introduction of the euro in 1999 provided major impetus to the integration of financial markets in Europe, thus making them more efficient and competitive, and reducing the costs of cross-border money transfers in euro.

A financial market is where savers and borrowers interact. Savers, such as individual citizens or companies, deposit their savings with a ‘financial intermediary’ such as a bank or pension fund. These financial intermediaries, who consolidate the savings of many depositors, then lend money to borrowers. Borrowers come in all sizes: they may be small, such as a family taking a mortgage for a new house; or large, such as a multinational company borrowing to invest in a new production plant. Borrowers pay interest on their loans, which is returned to the savers through the financial intermediaries as interest or dividends on their deposits.

Small may be efficient

Before the introduction of the euro, financial markets were largely national. Saving and lending was done mainly within the borders of a Member State. The country’s savers would lend to the country’s borrowers through nationally based banks and pension funds. However, the efficiency of nationally based financial markets was limited because the investment opportunities on offer, and the amount of competition between financial intermediaries (banks and other financial institutions) were also more limited.

Bigger is more efficient

The more integrated financial markets are, the more efficient the allocation of capital is because investments opportunities and competition are also greater, and capital can move around to where it can be used most efficiently.

The introduction of the euro in 1999 proved to be a powerful catalyst to the integration of financial markets and the creation of a much larger, more efficient single financial market, which brings many economic benefits:

  • A single financial market allows individual citizens and companies to invest throughout the euro area to obtain the best return on their savings. It creates opportunities to borrow from across the euro area, seeking out the lowest cost for their loan. Investors can also spread risks more widely.
  • The costs of financial intermediation, such as bank charges, are lower. In the euro area there are more banks and investment funds and thus there is more competition between them. Lower costs encourage more capital flows.
  • More capital is available to borrowers at a lower cost because there are more sources of capital. This makes the money they borrow cheaper and better tailored to the needs of the borrower.
  • Because borrowing is cheaper this makes more capital available for further lending. This encourages citizens and companies to borrow more to invest – which creates more economic growth and more employment, and benefits the EU economy as a whole.

Building the single financial market

The single currency was a key step towards the creation of the single financial market. Its introduction immediately removed some obstacles to free capital flows – namely the costs associated with exchanging different currencies. Previously, these costs were a barrier to cross-border investments – today they no longer exist in the euro area.

Backed by the Commission's Financial Services Action Plan – also launched in 1999 – the euro has resulted in a rapid expansion and integration of European bond and money markets. Since the introduction of the euro, cross-border bank deposits have increased, the yields on government bonds have converged, and the interest rates on retail loans, taken out by individual citizens, have also converged.

But harmonisation of the structures and regulations of the financial market sector is also needed to ensure the remaining barriers are removed and efficiency is promoted. For example, barriers arising from different IT systems must be removed through common technical standards; legal issues for company mergers and takeovers must be resolved to enable consolidation among the financial intermediaries; and regulatory issues on how national markets operate must be harmonised to ensure full integration. The White Paper on Financial Services Policy (2005-2010), adopted by the Commission in December 2005, aims to achieve a fully integrated, open, inclusive and efficient EU financial market which completes the single market and contributes to improve EU competitiveness as part of the Lisbon reform process.

The Single Euro Payments Area

An important aspect of the single financial market is payments, which daily affect cross-border transactions of citizens and business. The costs of sending money in euro to another euro-area country have already been slashed by as much as 90% since the introduction of the euro and EU rules on cross-border euro payments in 2001.

These rules make the costs of making a payment in euro to an account in another Member State the same as the costs of a domestic transaction. This has applied to payment card transactions and withdrawals from ATMs since 1 July 2002, and to credit transfers since 1 July 2003.

The Single Euro Payments Area (SEPA), initially planned for 2010, is a further step in the same direction. An initiative of the European banking industry, it aims to further facilitate electronic payments across the euro area by making them as easy, safe and efficient as if they were done within one Member State and subject to identical charges. Citizens will benefit from faster and more secure transfers between bank accounts anywhere in the euro area, and will be able to use their bank debit card when shopping abroad as they would at home. The Commission has helped the development of SEPA by preparing the necessary legal framework in the form of a Directive on Payment Services.