The Eastward Enlargement of the Eurozone the Shaping of Capital Markets

• Capital markets have undergone massive changes in the past decade; in Western Europe but of course more fundamentally in the Central and Eastern European Countries (CEEC). • The euro has fostered the transformation of financial systems toward a more market based approach. Its impact in Eastern Europe will be even stronger. • To ensure the success of EMU an active and open-market stance is required. The euro increases the cost of failure and thus provides a strong incentive to comply. • Repercussion to current members will be stronger, hence, they will not allow any substantial deviation from the consensus economic policy. • A common currency fosters capital market integration—ie, liberalisation, deregulation, and consolidation of financial services throughout the currency area. Competition increases and will lead to higher efficiency. • More efficient financial markets improve the allocation of capital and hence contribute to long-term growth and prosperity. The main vehicle is more and better investments. • In the short run it will be important to avoid imbalances which might destabilise the CEE applicant states • Capital inflows to the CEEC might overshoot a sustainable level and be channelled into unprofitable investments. Eventually this money may be withdrawn all of a sudden undershooting the long-term level and depriving the applicant states of financial resources and leading to crisis. • A prudent treatment of these flows requires a developed capital market, something the CEEC are only about to acquire. Hence, special attention should be given to the evolution of financial institutions and a sufficient regulatory framework. Applicant states should use foreign capital flows to promote capital market development—eg, in the form of foreign entry of banks. • The adoption of the acquis communautaire and the Stability Pact provides a tested institutional framework and macroeconomic stability. Both support financial development. Executive Summary • Capital markets have undergone massive changes in the past decade; in Western Europe but of course more fundamentally in the Central and Eastern European Countries (CEEC). • The euro has fostered the transformation of financial systems toward a more market based approach. Its impact in Eastern Europe will be even stronger. • To ensure the success of EMU an active and open-market stance is required. The euro increases the cost of failure and thus provides a strong incentive to comply. • Repercussion to current members will be stronger, hence, they will not allow any substantial deviation from the consensus economic …