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The Euro and financial markets

6 important questions on The Euro and financial markets

Shortly describe the integration of money markets in the EMU

From 1999 - 2010, it can be said that money markets were fully integrated. ECB applied the same interest rate to all its lending to the banks > same interbank lending interest rate. But debt crisis in 2010 ended this. Currently, the interbank market in Europe is disrupted as banks distrust each other

Shortly describe the integration of bond markets in EMU

Very integrated since the start of the Eurozone. The government debt crisis changed this (interest differentials on government bonds increased heavily) > a setback in the integration process
Corporate bond markets did not integrate that much due to the differences in legal systems (e.g. account rules).

Explain how banking sectors integrated in the EMU

The euro led to a full integration of the interbank market until 2010, when the sovereign debt crisis happened, the retail part of the banking sector remained segmented throughout the period.
But there is (slow) progress in the banking integration. Reason for slowness: the continuing existence of national legislations that regulate banks in the national territories

Why is financial market integration important in a MU?

Financial market integration can function as an insurance mechanism facilitating adjustment to asymmetric shocks. 'Risk sharing'

Explain what is meant by risk sharing and a disadvantage of it

When a shock occurs to an individual country, the shock is shared by all countries, mitigating the effect. The income of the shock country can be kept relatively high compared to output.
Disadvantage: residents of the booming country see their income increase at a lower rate than their output

Name factors leading to the emergence of an international currency and what factors expectedly increase the chances for the Euro to become international

1. structural factors (economic size and size of financial markets)
2. policy environment (monetary & financial stability)
3. network externalities (how many others use the same currency)
4. freedom to buy and sell assets

Monetary stability is indicated by inflation rates, since this is the main objective of the ECB, likely to be achieved. It must overcome the sovereign debt crisis however.

The question on the page originate from the summary of the following study material:

Economics of Monetary Union | 9780199684441 | Paul De Grauwe

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