Financial integration in Europe through the lens of composite indicators

Abstract

This paper develops price- and quantity-based composite indicators of financial integration for the euro area. We develop a novel method that homogenises information from different market segments and benchmarks them to a state of perfect integration. The time-series development of both indicators shows that the global financial crisis and the ensuing sovereign debt crisis in the euro area led to considerable financial fragmentation from which the monetary union has not yet fully recovered. In a set of panel regressions for 19 member states, we find a significant positive association between financial integration and economic growth.