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Border Crossing

The advent of the euro is a significant event for investment managers. "EMU and Portfolio Adjustment", CEPR Policy Paper 5 explores the impact of the euro on portfolio allocation and the structure of European securities markets.

James Morgan, interviews Laura Bottazzi and Jean-Pierre Danthine, two of the authors. Some of the issues they discussed:

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Questions and Answers

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1. You wanted to find what the impact of the introduction of the euro was on portfolio allocation [James Morgan]
... The disappearance of currency risk is not systematic across countries, and it is probably very difficult to estimate ... [Jean-Pierre Danthine]
Were you surprised? [James Morgan]
... The euro meant one was actually reducing the possibilities of the number of ways one could allocate resources ... [Laura Bottazzi]

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2.  There were six assets instead of seven, is that correct? [James Morgan]
That is just a simplification, there are more than that. The euro meant that within Euroland there would be only one risk-free asset instead of one for each country. The effect is not tremendous ... [Jean-Pierre Danthine]

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3. You say there should be greater harmonisation and a central payments system. Who should organize this and why? [James Morgan]
... Perhaps the European Central Bank could fulfill this role ... [Laura Bottazzi]
And this would be the best solution, because nobody else can do it? [James Morgan]
... The market might but of course that would take time ... [Laura Bottazzi]

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4. Why do you recommend harmonisation rather than competitive solutions for issuance? [James Morgan]
For settlement the natural player is the ECB. I doubt that coordination will happen naturally or quickly by itself. That doesn’t mean only one system or that it should be publicly run, but there should be some impulse from public authorities ... [Jean-Pierre Danthine]

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5.  If you have a single financial market in Europe, you lose local markets which can be useful taking advantage of the local information available to local analysts? [James Morgan]
... This is the case for equity exchanges. Bankers and players complain that there is too much segmentation among markets in Europe, so market participants themselves would like more uniformity, or at least more centralization ... [Jean-Pierre Danthine]

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6.  What did you find when you were looking through the data? [James Morgan]
Nobody had collected the data agent-by-agent and they were not very willing to release this data... .we found that people were not aware of the cost differences faced when investing abroad ... [Laura Bottazzi]

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7. The problem you talk about is the ‘home bias puzzle'. But even in the US you find regional funds which have a ‘home bias’. Is home bias a bad thing? [James Morgan]
... the fact that we don't understand home bias fully means that we have a lot of trouble saying how costly it is .... [Laura Bottazzi]

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8.  Finally, in the end, from your point of view, does the euro matter? [James Morgan]
... Yes it does matter ... Once it is defined in a broader sense, we realise that it is an important part because it advances economic integration ... It also matters for investors ... it is important because we are looking at convergence in all markets. [Jean-Pierre Danthine]

How Do Central Banks Talk? Geneva Reports on the World Economy No. 3 - Report Details

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Gone are the days when monetary policy-making was conducted largely behind closed doors: central banks are becoming increasingly open in their communication strategies. A new Report evaluates how they talk – to the markets, the press and the public - Read more in "European Economic Perspectives"
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