No 12 (May 98/Mai 98/Mai 98)

Economic and Monetary Union is a further step towards European economic and financial integration. The focus to date has been on meeting the convergence criteria for participation in EMU and preparing for the changeover to the euro. The Commission is also turning its attention towards the profound impact the introduction of the euro will have on Europe's financial markets and financial services sector.

A pan-European capital market

The creation of a single currency zone will encourage the development of a pan-European capital market. By facilitating access to debt and equity funding, Europe's economy can maintain and improve its competitiveness at global level. But however deep and liquid capital markets may be, they can only deliver their full potential if persistent distortions to cross-border activity are removed. Member State requirements that a counterparty in the government debt securities market should be established in their jurisdiction is an obvious example. Furthermore, many institutional investors such as pension funds and insurance companies are still restricted by local regulations in their choice of asset to invest in. Combined with currency matching requirements, capital has not been able to flow as freely as it should. The euro will offer the possibility of wider investment in capital markets beyond present currency frontiers. The Commission's Green Paper on Supplementary Pensions explores how institutional investors could better take advantage of these opportunities ⁽¹⁾ .

The comparability of financial information would, at first sight, seem to increase when company accounts are drawn up in euro. Nevertheless, the many options that have been left open to Member States in the Accounting Directives will hinder the integration of capital markets. Even if company accounts were readily comparable, corporate issuers of equity would still have difficulty in accessing an integrated EU-equity market. The present partial harmonisation of listing procedures for stock exchanges has not resulted in companies seeking multi-listing of their shares in other countries. National restrictions on bids and offers and variations in prospectus requirements prevent corporate borrowers from access to a wider range of funding across the EU and for investors to reap the benefits of diversification. Making public offer prospectus rules more user-friendly, while maintaining the same level of investor protection would be vital for the integration of EU capital markets.

Financial services

Without a doubt the euro will increase competition in the financial sector through greater price transparency. In practice cross-border shopping of financial services will continue to be hampered by different consumer protection rules and tax regulations based on the principle of the `general good'. These obstacles exist for most financial products such as mortgage credit, life assurance, and UCITS. The euro will bring these differences and distortions in sharp relief and the application of any `host country' rules should be examined closely. The taxation of savings is a good example of work that has already been set in hand after the meeting of the Ecofin Council in December last year.

The euro will also reinforce the need to restructure national sectors and to reduce excess capacities. Particularly banks will face shrinking margins from foreign exchange dealing, declining activity in government bond trading, and falling revenues from derivatives sales and trading as the single currency reduces hedging needs.

The infrastructure

Successful financial integration depends on a solid infrastructure. Euro payment and securities settlement facilities must be optimal and need to be developed in tandem with the integration of capital markets. Systemic risk in these systems must be reduced, while differences between charges for cross border payments and payments within borders must be eliminated. Securities settlement systems must also be modernised. The present ad-hoc mechanisms for delivering completed, settled transactions after securities trades are inefficient. The Commission's proposal for the Settlement Finality Directive is one important step in the right direction.

Financial services legislation

Work to bring the financial services directives up to date was set in hand three years ago. Together with the Member States in the various financial services committees, DGXV has screened all the banking, insurance, and investment services' Directives in the light of EMU. No legislative changes will be required as the two regulations that will introduce the euro themselves will resolve the very large majority of technical legislative problems without a need for further legislative action. For the remaining questions, explanatory guidance notes have been provided by the Commission in its Communication of November 1997 ⁽²⁾ . In a number of cases the Commission has discussed and agreed certain legal interpretations in the framework of Committee meetings. Those texts are currently available ⁽³⁾ .

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