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Real capital market integration in the EU: How far has it gone? What will the effect of the euro be?


  • Georges de Ménil


Much effort has been devoted to the study of financial market integration in Europe. Little is known, however, about real capital market integration - the degree to which plants and equipment move to take advantage of locally high returns. This paper looks at the evidence. An analysis of flows of foreign direct investment in Europe shows that integration was quite limited in the early 1980s, but has increased considerably since then. Another analysis looks at rates of return of a large number of firms. It reveals that country-specific factors play a significant role in explaining corporate returns, even after taking risk into account. This finding is incompatible with the CAPM definition of market integration. The view that integration is limited in Europe is further strengthened when the same approach is carried out for the USA and Canada. Part of the national specificity appears to be related to labour and goods market regulations, which harm firms profitability. If, by introducing more transparency and eliminating currency risk, EMU strengthens competition on the real capital market, one obvious economic benefit will be a more rational and efficient use of capital, but the most important potential consequences are political. Special-interest regulations of an exclusively national nature will not survive. They will either fall in a wave of internationalist liberalization, or become embedded in 'harmonized' regulations at the federal level. A reduction in excessive regulatory burdens, notably in the labour market, could lead to substantial and shared productivity gains. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1999.

Suggested Citation

  • Georges de Ménil, 1999. "Real capital market integration in the EU: How far has it gone? What will the effect of the euro be?," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 165-201, April.
  • Handle: RePEc:bla:ecpoli:v:14:y:1999:i:28:p:165-201

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    References listed on IDEAS

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    Cited by:

    1. Schmidt, Christian W. & Broll, Udo, 2008. "The effect of exchange rate risk on U.S. foreign direct investment: An empirical analysis," MPRA Paper 10713, University Library of Munich, Germany.
    2. Yamamoto, Kazuhiro, 2008. "Location of industry, market size, and imperfect international capital mobility," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 518-532, September.
    3. Azariadis, Costas & Pissarides, Christopher A., 2007. "Unemployment dynamics with international capital mobility," European Economic Review, Elsevier, vol. 51(1), pages 27-48, January.
    4. He, Qing & Korhonen, Iikka & Guo, Junjie & Liu, Fangge, 2016. "The geographic distribution of international currencies and RMB internationalization," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 442-458.
    5. Martin Gassebner & Pierre-Guillaume Méon, 2010. "Where do Creditor Rights Matter? Creditor Rights, Political Constraints, and Cross-Border M&A Activity," Working Papers CEB 10-019.RS, ULB -- Universite Libre de Bruxelles.
    6. Andrew Hallett, 2002. "Britain and the euro," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(3), pages 335-348, September.
    7. repec:bof:bofitp:urn:nbn:fi:bof-201506101281 is not listed on IDEAS
    8. Mahesh Kumar Tambi, 2005. "Integration Of Financial Markets," Finance 0504014, EconWPA.
    9. Charles van Marrewijk & Gus Garita, 2008. "Countries of a Feather flock together," Tinbergen Institute Discussion Papers 08-067/2, Tinbergen Institute, revised 19 Sep 2008.
    10. Laura Márquez-Ramos, 2011. "European Accounting Harmonization: Consequences of IFRS Adoption on Trade in Goods and Foreign Direct Investments," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 42-57, September.
    11. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    12. Marcos Duenas & Rossana Mastrandrea & Matteo Barigozzi & Giorgio Fagiolo, 2017. "Spatio-Temporal Patterns of the International Merger and Acquisition Network," LEM Papers Series 2017/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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