Skip to main content
SpringerLink
Log in

The Center Still Holds: Financial Integration in the Euro Area

  • Symposium Article
  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

We employ cross-country variance tests using quarterly data over 2002–2013 to analyze the effect of the global financial crisis on euro area financial integration. Dividing the 12 core euro area countries into two groups, the euro center and the euro periphery, we investigate variances of the estimations across these two groups before and after the onset of financial crisis. We find a significant change in variances in a sample that includes both groups but no such change within just the euro center group. Using data for new euro area members, no significant changes in variances are found in these countries. Although the difference in variances appears to get smaller, financial integration within the euro area remains differentiated, with the center still holding.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2

Similar content being viewed by others

Notes

  1. The latter turned out to be to a degree a red herring given that these countries, in contrast to their euro periphery neighbors, had accompanied borrowing with growth supporting reforms. Not surprisingly, where parent–subsidiary relations were long term, cross-border links would prove to be stable and the main threat to these countries came largely from Western Europe even if lessons needed to be drawn about managing external imbalances in an increasingly integrated European financial market (see Gill and Raiser, 2012).

  2. The nationalization of Anglo Irish is treated as an important threshold in Mody and Sandri (2012), where the authors divide the period of euro area sovereign and banking crisis into three phases. The three phases are: (1) transmission of financial distress from the United States to Europe (from July 2007 to March 2008, which is marked by the rescue of Bear Stearns), (2) increasing stress on European governments due to public financial burden to bail out troubled banks (from March 2008 to January 2009, marked by the nationalization of Anglo Irish) and (3) intertwined financial and sovereign crisis strengthened after the Greece bailout in May 2010 (from January 2009).

  3. The group of euro center countries comprises Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands, and the euro periphery includes five countries that have faced market access difficulties since the global financial crisis – Greece, Ireland, Italy, Portugal and Spain.

  4. The similar argument in the context of emerging market economies can be found in Kose et al. (2009).

  5. All the indicators except dummy variables are taken from the World Bank World Development Indicators. Dummy variables for resource-rich countries and offshore financial centers are defined in IMF (2012, 2008), respectively. Transition economies include countries in Emerging Europe and Central Asia.

  6. See Table A1 in Appendix for the estimation results.

  7. This methodological framework is similar to the idea of coefficient stability test, in a sense that the analysis is based on two sub-samples in a time dimension and that both tests look at equality of estimated results from the two sub-periods. However, unlike the test for coefficient stability, in the variance test estimation of two sub-periods can be carried out in a single equation by allowing for different coefficients before and after the event. As another example of examining difference in the trends before and after an event, Eichengreen and Mody (2000) decompose factors that explain the change in spreads between two periods into two contributing parts: contributions of the change in observed economic fundamentals and the change in market sentiment.

  8. The ratings regression is also estimated using OLS.

  9. See Dell’Ariccia et al. (2002) and IMF (2007) for the statistical details of variance tests.

  10. Global factors (eg, US interest rate) can asymmetrically affect individual countries, depending on the degree of integration to the world. Similarly, country-specific factors can have region-wide effects (eg, the impact of fiscal imbalance in Italy on other euro area members’ bond yield spreads). Battistini et al. (2013) employ a dynamic factor model to take this relationship into account.

  11. The data on consumer sentiment start in 2002Q1 for Luxembourg. Since lagged values are used for this variable, we use a value of 2002Q1 for 2001Q4. The same modification is done for Malta (2003Q1) used in the section ‘Alternative integration measures and euro east’.

  12. Because of the data availability, Estonia is not included. Latvia is also excluded, since the country joined the euro area in January 2014.

  13. For Tables 6 and 7, the complete tables (presented as in Table 5), including all the quarter-by-quarter test results, are available as a PDF Appendix on the journal’s website.

References

  • Antonakakis, N and Vergos, K . 2013: Sovereign bond yield spillovers in the euro zone during the financial and debt crisis. Journal of International Financial Markets, Institutions & Money 26: 258–272.

    Article  Google Scholar 

  • Baele, L, Ferrando, A, Hördahl, P, Krylova, E and Monnet, C . 2004: Measuring European financial integration. Oxford Review of Economic Policy 20 (4): 509–530.

    Article  Google Scholar 

  • Baltzer, M, Cappiello, L, De Santis, RA and Manganelli, S . 2008: Measuring financial integration in new EU member states. ECB Occasional Paper 81, European Central Bank: Frankfurt, Germany.

  • Battistini, N, Pagano, M and Simonelli, S . 2013: Systemic risk and home bias in the Euro area. European Economy Economic Papers 494, European Commission: Brussels, Belgium.

  • Beck, T, Feyen, E, Ize, A and Moizeszowicz, F . 2008: Benchmarking financial development. World Bank Policy Research Working Paper 4638, World Bank: Washington DC.

  • Bernoth, K, von Hagen, J and Schuknecht, L . 2012: Sovereign risk premiums in the European government bond market. Journal of International Money and Finance 31 (5): 975–995.

    Article  Google Scholar 

  • Caporale, GM, Matousek, R and Stewart, C . 2011: EU banks rating assessments: Is there heterogeneity between new and old member countries? Review of International Economics 19 (1): 189–206.

    Article  Google Scholar 

  • Codogno, L, Favero, C and Missale, A . 2003: Yield spreads on EMU government bonds. Economic Policy 18 (37): 503–532.

    Article  Google Scholar 

  • De Grauwe, P and Ji, Y . 2012: Mispricing of sovereign risk and macroeconomic stability in the eurozone. Journal of Common Market Studies 50 (6): 866–880.

    Article  Google Scholar 

  • Dell’Ariccia, G, Schnabel, I and Zettelmeyer, J . 2002: Moral hazard and international crisis lending: A test. IMF Working Paper 02/181, International Monetary Fund: Washington DC.

  • Ehrmann, M, Fratzscher, M, Gürkaynak, RS and Swanson, ET . 2011: Convergence and anchoring of yield curves in the euro area. The Review of Economics and Statistics 93 (1): 350–364.

    Article  Google Scholar 

  • Eichengreen, B and Mody, A . 2000: What explains changing spreads on emerging market debt? In: Edwards, S. (ed). Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies. University of Chicago Press: Chicago, IL, pp. 107–136.

    Google Scholar 

  • Eichengreen, B and Mody, A . 2001: Bail-Ins, bailouts, and borrowing costs. IMF Staff Papers 47 (Special Issue): 155–187.

    Google Scholar 

  • European Central Bank (ECB). 2011: Financial integration in Europe. May. European Central Bank: Frankfurt, Germany.

  • European Central Bank (ECB). 2013: Financial integration in Europe. April. European Central Bank: Frankfurt, Germany.

  • Favero, C and Missale, A . 2012: Sovereign spreads in the eurozone: Which prospects for a eurobond? Economic Policy 27 (70): 231–273.

    Article  Google Scholar 

  • Gabrisch, H and Orlowski, LT . 2010: Interest rate convergence in Euro-candidate countries: Volatility dynamics of sovereign bond yields. Emerging Markets Finance and Trade 46 (6): 69–85.

    Article  Google Scholar 

  • Gill, I and Raiser, M . 2012: Golden growth: Restoring the lustre of the European economic model. With Dall’Olio, AM, Packard, T, Richter, K, Sugawara, N, Veugelers, R and Zalduendo, J. World Bank: Washington DC.

  • Hodrick, RJ and Prescott, EC . 1997: Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking 29 (1): 1–16.

    Article  Google Scholar 

  • Im, KS, Pesaran, MH and Shin, Y . 2003: Testing for unit roots in heterogeneous panels. Journal of Econometrics 115 (1): 53–74.

    Article  Google Scholar 

  • International Monetary Fund (IMF). 2007: Fund financial support and moral hazard: Analytics and empirics. Paper prepared by Ghosh, A, Kim, J, Rahman, L and Zalduendo, J. International Monetary Fund, Washington DC.

  • International Monetary Fund (IMF). 2008: Offshore financial centers: A report on the assessment program and proposal for integration with the financial sector assessment program. Report prepared by the Monetary and Capital Markets Department and the Legal Department, International Monetary Fund: Washington DC.

  • International Monetary Fund (IMF). 2012: Macroeconomic policy frameworks for resource-rich developing countries. Report prepared by an IMF staff team led by Ghura, D and Pattillo, C. International Monetary Fund: Washington DC.

  • Kalbaska, A and Gątkowski, M . 2012: Eurozone sovereign contagion: Evidence from the CDS market (2005–2010). Journal of Economic Behavior and Organization 83 (3): 657–673.

    Article  Google Scholar 

  • Kim, S and Lee, J-W . 2012: Real and financial integration in East Asia. Review of International Economics 20 (2): 332–349.

    Article  Google Scholar 

  • Kim, S-J, Lucey, BM and Wu, E . 2006: Dynamics of bond market integration between established and accession European union countries. Journal of International Financial Markets, Institutions and Money 16 (1): 41–56.

    Article  Google Scholar 

  • Kose, MA, Prasad, E, Rogoff, K and Wei, S-J . 2009: Financial globalization: A reappraisal. IMF Staff Papers 56 (1): 8–62.

    Article  Google Scholar 

  • Lee, H-H, Huh, H-S and Park, D . 2013: Financial integration in East Asia: An empirical investigation. The World Economy 36 (4): 396–418.

    Article  Google Scholar 

  • Maltritz, D . 2012: Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach. Journal of International Money and Finance 31 (3): 657–672.

    Article  Google Scholar 

  • Manganelli, S and Wolswijk, G . 2009: What drives spreads in the Euro area government bond market? Economic Policy 24 (58): 191–240.

    Article  Google Scholar 

  • Melander, O, Pant, M, Segoviano, M and Vamvakidis, A . 2011: Dancing spreads: Market assessment of contagion from the crisis in the euro periphery based on distress dependence analysis. International Advanced in Economic Research 17 (3): 347–363.

    Article  Google Scholar 

  • Mink, M and de Haan, J . 2013: Contagion during the Greek sovereign debt crisis. Journal of International Money and Finance 34: 102–113.

    Article  Google Scholar 

  • Mody, A and Sandri, D . 2012: The Eurozone crisis: How banks and sovereigns came to be joined at the hip. Economic Policy 27 (70): 199–230.

    Article  Google Scholar 

  • Olivero, MP and Madak, R . 2013: Financial integration within Europe and the international transmission of business cycles among industrialized countries. Applied Economics 45 (1): 111–122.

    Article  Google Scholar 

  • Pagano, M and von Thadden, E-L . 2004: The European bond markets under EMU. Oxford Review of Economic Policy 20 (4): 531–554.

    Article  Google Scholar 

  • World Bank. 2012: Global financial development report 2013: Rethinking the role of the state in finance. World Bank: Washington DC.

Download references

Acknowledgements

The authors thank two anonymous referees and Paul Wachtel for helpful comments and suggestions. The findings, interpretations and views expressed in this article are entirely those of the authors and do not necessarily reflect those of the World Bank and the International Monetary Fund, their Executive Directors or the governments they represent.

Author information

Authors and Affiliations

  1. Office of the Chief Economist, World Bank, 1818 H Street, NW, Washington, DC 20433, USA

    Indermit S Gill

  2. Research Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA

    Naotaka Sugawara

  3. Western Hemisphere Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA

    Juan Zalduendo

Authors
  1. Indermit S Gill
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Naotaka Sugawara
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Juan Zalduendo
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

Supplementary information accompanies this paper on the Comparative Economic Studies website (www.palgrave-journals.com/ces)

Electronic supplementary material

Appendix

Appendix

Table A1

Table A1 Quantile regression results (2002–2011): Median estimates
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Gill, I., Sugawara, N. & Zalduendo, J. The Center Still Holds: Financial Integration in the Euro Area. Comp Econ Stud 56, 351–375 (2014). https://doi.org/10.1057/ces.2014.15

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/ces.2014.15

Keywords

JEL Classifications

Search

Navigation