Financial and trade integration in the EU countries

Abstract

Because of the creation and enlargement of the Eurozone, the importance of monetary integration is increasing and is the subject of a number of theoretical and empirical studies. The adoption of a common currency has to be accompanied by financial market integration. The aim of the paper is to assess the relationship between financial and trade integration in the EU member countries (divided into three subsamples: EU27, EU10, and EU17) over the period 1993–2012 (and two subperiods 1993–2007 and 2008–2012). We use quantity-based measures of financial integration derived from the countries’ international investment positions with a view to the foreign trade and the method of correlation analysis (including the moving correlation method). We conclude that the progress in financial integration was smaller in the EU10 countries compared to the EU16 countries, i.e. the pace of financial integration was higher in the EU16 countries than in the EU10 countries. The process of trade integration in all EU countries was not as fast as the process of financial integration. We also conclude that there is a linear association between financial and trade integration in the pre-crisis period (1993–2007), especially in the EU10 countries (compared to the EU16 countries). However, this relationship was seriously weakened by the financial crisis. Financial and trade integration are interconnected processes and should not be assessed separately. However, world trade (and thus financial integration) can be undermined by limiting trade finance as a result of tightening financial regulation and supervision after a decade of loose regulation and supervision (e.g. by the implementation of the Basel III capital framework).