European Capital Markets with a Single Currency

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Abstract
The purpose of this study is to identify the various ways in which a single currency will fundamentally and permanently alter European capital markets. No attempt is made to analyse the short term changes resulting from the introduction of the Euro, since this has already been examined by numerous institutions. Rather, the study focuses on the medium and long term impact of the introduction of the Euro. The overall question addressed by the study is the likely changes in the European capital markets once a single currency is in place. This is a complex issue for two main reasons: first, there is no historical precedent from which conclusions can be drawn; second, capital markets are already affected by major forces, such as deregulation, institutional savings, information technology and the globalization of corporate clients.

The report addresses the following topics:

  • Impact of a single currency on the sources of competitive advantage of securities and investment firms.
  • Theoretical modelling of the role of size in competition in commodity-type markets such as bonds or foreign exchange. 
  • Pricing of government bonds in the absence of an inflation-tax.
  • Competition between derivatives markets.
  • Sources of competitive advantage in corporate securities underwriting and  trading under a single currency.
  • Correlation between European stock exchanges under a single currency
  • Emergence of European funds
  • Impact on liquidity and risk premia
  • Sources of competitive advantage in fund management industry under a single currency
  • Corporate bond credit pricing with a single currency
  • Development of international currencies
  • Competition between the Euro and the US dollar
  • Functioning of European monetary policy and impact on capital markets