European Capital Markets with a Single Currency

Published in: 
Jean Dermine, Pierre Hillion

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. It is the first academic investigation of the effect of EMU on capital markets. One of the greatest events in financial history will occur in 1999: the birth of the euro and the emergence of a unified European capital market.

This is the first academic text to consider the medium term impact of a single currency on these markets. It tackles several key questions: Once the euro is in place, what is likely to change in European capital markets? How is the structure of the bond, equity, and derivative markets going to be affected? Are these markets going to be integrated? Is the disappearence of exchange rate uncertainty going to affect risk premium on the equity and corporate debt markets? Is the euro going to compete with the US dollar, and does this matter? Is the introduction of the euro likely to change the sources of competitive advantages of financial institutions? What are going to be the key factors for success in the industry?

The European Capital Markets Institute commissioned a report to address these issues. Drawn from various countries and fields of research - banking, economics, and finance - the contributors analyse the structural effects of the introduction of euro on European capital markets.     


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.   



1: Jean Dermine: European Capital Markets: Does the Euro Matter?

Part I. The Macroeconomics of EMU

2: Daniel Gros and Karel Lannoo: EMU, Monetary Policy, and Capital Markets

3: Charles Wyplosz: An International Role for the Euro?

Part II. The Fixed-Income Markets

4: Lars Nielsen: Yield Spreads and Optimal Deby Management under the Single Currency

5: Gordon Delianedis and Pedro Santa Clara: The Exposure of International Corporate Bond Returns to Exchange Rate Risk

6: Alfred Steinherr: European Futures and Options Markets in a Single Currency Environment

Part III. The Equity Markets

7: Giorgio De Santis, Bruno Gérard, and Pierre Hillion: The Single European Currency and World Equity Markets

8: Bruno Biais: European Stock Markets and European Unification

Part IV. Strategic Industry Implications

9: Ingo Walter: The Asset Management Industry in Europe: Competitive Structure and Performance under EMU

10: Roy Smith: The European Securities Industry under a Single Currency  


Published in January 1999

Edited by: Jean Dermine, Professor of Banking and Finance; Director, INSEAD Center for International Financial Services; and Pierre Hillion, Professor of Finance, INSEAD.

ISBN 978-0-19-829539-6 

Hardback: 376 pages

Available from Oxford University Press and selected bookstores.