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EUROPEAN FINANCIAL MARKET INTEGRATION, PRIVATE INVESTMENT AND EMPLOYMENT CREATION

The process of financial integration in Europe has gathered pace in recent years with the introduction of the EMU, but reflects a much longer and deeper process of capital market liberalisation and expansion of large financial intermediaries. This process has been extensively studied, but mainly from the point of view of financial market efficiency - particularly the degree of inter-bank bank competition on the one hand, and the allocation of investment across stock markets on the other. However, little attention has been given to the effect of this process of financial integration on corporate investment in general (and that of small and medium firms in particular) and thus on production, productivity and eventually employment. In this paper we argue that there is a considerable and worrying potential market failure emerging from EU financial integration, due to the changing nature of bank operations on the one hand and the access barriers to stock markets on the other. There is an evident need for integrated European approach to finance and investment/employment - but current EU economic policy scoping appears to ignore this linkage almost completely. Much more policy-focussed research is needed into to translate these broad conclusions into a useable framework for action.