The Euro and Financial Markets

The financial landscape of Europe has been evolving rapidly in the past 20 years. The introduction of the euro and the inception of the single monetary policy on January 1, 1999, accelerated the pace of change. However, it is clear that many driving factors foster transformation in the European financial system, including the Single Market Program, technological developments, financial innovation, globalization, liberalization, increased competition, and deregulation (for a brief review, see Gaspar, Hartmann, and Sleijpen 2003, chap. 1). The financial system is a key element determining the functioning and the performance of modern economies. It may be defined as the set of markets and institutions (intermediaries) through which households, firms, and governments channel available savings to investment opportunities (financing), carry out transactions (payments and settlements), and take relevant information into account (production of information, screening, and monitoring). The financial system is of key importance for the intertemporal allocation of resources, the allocation of risk, and the production of information. It is therefore not surprising to see a link between growth and finance associated with greater efficiency in the allocation of capital and, more generally, in the functioning of markets (see Hartmann et al. [2003] and Baele et al. [2004] for further references).