Traditionally, the efficiency of these markets has been hampered by costs associated with the use of multiple currencies. Given the large volumes traded in financial markets, even small transaction costs can produce substantial distortions. The euro has reduced those transaction costs and has improved the efficiency of European financial markets.
For example, euro area cross-border holdings of bonds have increased strongly – from about 10 percent at the end of the 1990s to 60 percent in 2006 3 . This suggests that investors are increasingly diversifying their portfolios across the euro area. Together with financial innovation, the euro has increased market liquidity and the opportunity for risk sharing.