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EMU
and Portfolio Adjustment
‘Europe
has 15 stock exchanges, more than 20 derivative markets and no national
centre for bond trading.’ In spite of this costly gap facing those who
seek pan-European assets, there is still no prospect for the emergence
of pan-European securities markets with centralised settlements systems.
There is also a vacuum because the European Central Bank has no legal
mandate to solve the settlements problem. And would-be pan-European
investors face obstacles that are designed to protect domestic markets
while governments pursue non-cooperative solutions in their search for
integrated bond markets.
These
conclusions appear in the latest Policy
Paper published by the Centre for Economic Policy Research, prepared
by five leading financial market economists in Britain, Switzerland and
Italy and discussed by two of the authors, Laura Bottazzi and Jean-Piere
Danthine, at a London Lunchtime Meeting on 25 January
2001. The paper
offers a unique insight into the economic determinants of the home-bias
puzzle in Europe and the ‘unacceptably high’ settlement costs in
European markets. It notes: ‘[T]he potential offered by EMU for
reducing drastically these costs and the need to take the accompanying
measures to reach this goal so as to permit the realisation of a single
European capital market are worth emphasising.’ The paper also shows
how credit and liquidity risk have assumed greater weight in investment
strategy.
On
this basis, the Policy Paper
adopts Modern Portfolio Theory to discuss further implications of EMU
for investment. The authors are tempted ‘to conclude that, as far as
asset returns are concerned, the importance of EMU is likely to come to
a greater extent from the evolving economic structures that affect
return correlations than from the mechanical effect associated with the
disappearance of currency risk’. It may well be true that the euro is
only a minor event for investors.
Recommendations
include the following:
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Some
European authority has to adopt a tougher attitude in achieving an
integrated securities market.
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More
action is needed to cut the costs of cross-border investment.
-
Governments
should harmonise the issuance calendar and maturity of their bonds. But
instead they are competing to attract non-Eurozone capital. ‘The
emergence of a single futures contract would be an important step
towards an integrated European government bond market.’
But
innovation in cross-border transactions and competition between all
types of standards should be encouraged, as should cooperation between
regulators.
There
has been some progress. Important steps include the consolidation of
national fiscal budgets and the privatisation of the telecommunications
industry. The report says ‘The fiscal framework has paved the way for
an improved investment environment. It also gave the European corporate
bond markets a much-needed boost’. But it warns: ‘While these
efforts should be acknowledged, it should be emphasized as well that
such policies should be continued if the efficiency gains expected from
the euro are to be fully realized.’
Notes
for Editors:
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is a network of over 500 Research Fellows based throughout Europe, who
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helps its Research Fellows to develop projects, obtain their funding,
administer them and disseminate their results. The Centre’s research
ranges from open economy macroeconomics to trade policy, from the
economic transformation of Central and Eastern Europe to regionalism in
the world economy. For further information about CEPR, please contact
Rita Gilbert, Tel: (44 20) 7878 2917 or email: rgilbert@cepr.org,
or contact James Morgan, Tel: (44 20) 8225 7262. Visit our website for a
copy of this document or for additional services: http://www.cepr.org
The
Speakers:
Laura
Bottazzi is
at IGIER, Università Bocconi in Milan and is also a Research Affiliate
in CEPR’s International Macroeconomics research programme. Jean-Pierre
Danthine is Professor of Economics at Université de Lausanne and is
also a Research Fellow in CEPR’s International Macroeconomics,
Financial Economics and Public Policy research programmes.
EMU
and Portfolio Adjustment -
CEPR Policy
Paper 5
by
Kpate Adjaouté, Laura Bottazzi, Jean-Pierre Danthine, Andreas Fischer, Rony
Hamaui, Richard Portes and Mike Wickens
ISBN
1 898128 58 8 – £10/$15.00/€15.00
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