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European Affairs
Letters to the Editor
Economic Policy Makers Must Look Beyond National Borders
Hung Q. Tran
The Special Report section on Managing Europe's New Money (European Affairs, Spring 2002) presented an informative and multi-faceted review of the process of European monetary, financial and economic integration. This is particularly useful for American readers. I would like to add a few comments on the subjects of European financial integration and the integration of the EU and U.S. economies.
Hervé Carré gave a good analysis of the Financial Services Action Plan with its 42 legal and regulatory measures designed to foster an integrated financial market in Europe. I would highlight two more areas that need improvement: technical barriers and the burden of regulatory reporting.
Market barriers of a strictly technical nature (differences in IT platforms, national restrictions leading to multiple systems, impediments to remote access, cross-border settlement and payment inefficiencies) together with all the legal/regulatory and tax differences mentioned in Carré's article continue to perpetuate the segmentation of European financial markets. In EU securities transactions, cross-border trades cost eight to ten times more than national trades. In short, while European monetary integration has arrived, an integrated securities market is still some way off.
There are 39 supervisory authorities for prudential supervision in the EU. A large financial institution has to report to over 20 supervisors. Consequently, the Lamfalussy report recommending convergence of EU regulatory and supervisory structures should be expeditiously implemented.
Karen Johnson offered very interesting insights into the integration of the EU and U.S. economies. Following her thoughts, one can enumerate some additional features.
More integration means tighter economic and financial linkages between the United States and the EU. Decisions by big businesses and institutional investors are increasingly being influenced by developments on both sides of the Atlantic, instead of being strictly domestically driven.
Of course, integration has both an upside and a downside. For example, the high correlation between U.S. and European equity markets at present may seem puzzling to some observers who attribute the sell-off to lack of investor confidence in the accuracy of U.S. financial reports, and uncertainties about the strength of U.S. corporate profitability.
Integration also means that EU-U.S. balance of payments data have become more difficult to interpret, and probably less relevant. One example is the fact that foreign affiliates of U.S. companies now account for a sizable proportion of imports into the United States. They also deliver a substantial volume of services, which has become an important "export" item, reflecting evolving U.S. comparative advantages. On the other hand, foreign companies have increasingly invested directly in the United States so that they can produce and market their products near their customer bases in the largest market in the world. These practices render the traditional concept of "trade deficit" and "financing the deficit" less useful in understanding economic developments.
The implication for policy makers is clear. They will have to look carefully beyond their national borders in formulating economic policies.
Hung Q. Tran
Deputy Director, International Capital Markets Department
International Monetary Fund
Washington, DC