This is because the tendency to invest more in international markets – as reflected in the surge in crossborder portfolio flows – has been accompanied by the tendency of households to shift part of their savings towards riskier domestic assets, as the sharp rise in countries’ domestic market capitalisation reveals. What can we say about the future? We should expect that home bias will continue to decline, most likely at a slow pace, because investors need to perceive that diversifying their global portfolio more and more on a global scale will reduce risk; for that they need to become more familiar with the international environment. 7  See for example French and Poterba (1991), Coval and Moskowitz (1999) and Huberman (2001). 8  See Solnik (1974). 9  De Santis and Gérard (2006) provide the methodology here adopted to compute home bias measures. 4  BIS Review 43/2006  Impact of EMU on portfolio reallocation and financial integration Did EMU play a role in the reallocation of capital worldwide and on financial integration? To answer this question, we need to remind us what a monetary union implies. The elimination of the exchange rate risk is the first obvious implication, which is also a feature of other fixed exchange rate regimes. But the fundamental difference is that – when EMU was established – Member States committed to irrevocable conversion rates of their currencies.
The economic impact of globalisation and the role of EMU I would now like to turn to the main area of my paper and discuss, first, the economic impact of globalisation on economic linkages – most notably trade and capital flows – and second, the impact of EMU on regional financial integration and global portfolio reallocation. Impact on trade, foreign direct investment and cross-border portfolio flows The effects of globalisation are channelled via trade in goods and services, all of which has a tangible impact on businesses and households. Globalisation means that transport costs have decreased, technological innovations are more easily diffused, information is readily available at a low cost, and consumer tastes have been converging with an increasing number of global brands. Over the last three decades, tariffs have halved and a large number of trade agreements have entered into force between various countries. These developments have resulted in a steady opening of markets in Europe and around the world. In the early 1970s, for example, global exports accounted for only onetenth of world GDP, compared with one-quarter today. The share of intermediate inputs in total trade flows is also at a historically high level, reflecting the dramatic deepening of global economic interlinkages in recent years. Higher global demand and increase in the use of the euro in international trade have contributed to this new phenomenon. While intra-euro area trade has grown robustly since the introduction of the euro, extra-euro area trade has recorded even more rapid growth.