The euro and the financial markets The creation of the euro has accelerated the development and integration of the capital markets in Europe, which, in recent years, have also been fostered by financial liberalisation and technological innovation. This also contributes to high growth, as more efficient financial markets help in allocating funds to their best use. In effect, the single currency has removed the exchange risk between the countries of the euro area. It is facilitating the standardisation of debt instruments and their management on a larger scale. This integrative effect of the euro has been most evident in the money market, by virtue of, in particular, the establishment of TARGET, the large-value payment system. This integration has shown itself in, for example, the rapid adoption by the market of reference rates for the euro area, such as the EONIA overnight rate or the EURIBOR for maturities of less than one year. Above all, we have seen a total convergence in short-term interest rates within the euro area. In bond markets, the integration of markets remains incomplete, owing, for instance, to national differences in respect of taxation, accounting and supervisory regulations and payment and settlement systems. Nevertheless, the integration of bond markets is progressing. We have seen European bond indices become standardised. The differences in rates between sovereign issues within the euro area fell substantially in 1998. Furthermore, 1999 was characterised by a spectacular growth in euro bonds issued by private non-financial firms. These issues increased by almost 300% in 1999, as compared with 1998.
The increase was particularly large for issues with a lower rating. For example, issues with a Baa rating increased by 500%, albeit from a very low level. From a global perspective, the growth in the bond market is contributing to the internationalisation of the euro. In 1999, international bond issues denominated in euro amounted to 40% of total worldwide bond issues. This constitutes an amount comparable with bond issues denominated in US dollars. In the same way, the integration of stock markets is progressing, although they will have to overcome barriers of the same kind as those which I have just mentioned in relation to the bond markets. A notable increase in transactions on the new European indices has been observed. Moreover, the “new  BIS Review 58/2000  6  markets”, with growth figures benefiting greatly from the establishment of the large European market, have expanded considerably. Finally, the announcement of stock exchange alliances and mergers over recent months reflects the logic of stock market integration and will accelerate the process. As I have said, the broadening of the capital markets and their greater integration are contributing to a more efficient allocation of savings. First, this development is leading to lower transaction costs and is increasing the liquidity of the traded instruments. This, in turn, will contribute, all other things being equal, to reducing the absolute level of interest rates. Second, it is multiplying investment opportunities, increasing the range on offer and fuelling competition between issuers.