Capital Market Integration in the EU and ASEAN

Abstract

Two different financial crises partly fueled by the heavy dependence in traditional bank lending have led both the European Union (EU) and Association of Southeast Nations (ASEAN) to turn their focus towards the development of the capital market sector as an alternative. However, thirty years hence, the region’s capital markets remain in a fragmented state and regulated along national lines. Cross-border delivery of financial services by intermediaries and investment remain a challenge as substantial restrictions on the movement of capital across borders still remain. This gave rise to the Capital Markets Union (CMU) plan to integrate EU’s capital markets and mobilize the flow of capital within the region by 2019. But this movement is not exclusive to EU alone. Prior to the inception of the CMU plan, the ASEAN has already begun to introduce measures to reduce the region’s heavy dependence on the banking sector and develop its capital markets as a direct reaction to the 1997 Asian Financial Crisis. Such measures are now consolidated into the “ASEAN Capital Markets Integration Framework” and is still an ongoing project. While such framework can be considered as an “older” movement than the CMU, the initiatives found in the latter are admittedly more far-reaching than the other. The similarity of the issues encountered and measures proposed to solve them have raised an interesting and unique opportunity to compare and contrast the two initiatives as they are being pursued almost simultaneously. The primary purposes of this paper are to examine how the two movements compare and contrast with each other and how they will affect EU-ASEAN relations. Two possibilities are considered: (1) It will give a rise to a competition for capital and new markets or (2) there will be an increased coordination of market practices and regulations.