Regional Financial Integration in Europe: A Blueprint for North America?

Abstract

Monetary and financial integration are complements to deep economic integration. Indeed, progress toward a single market may be in continuous jeopardy without them. Monetary union, in turn, is a prerequisite, and part and parcel, of deep financial integration. Otherwise, in countries on the periphery, such as Poland with regard to the European Union and Mexico with NAFTA, the need to protect the inefficient, high-cost, domestic financing business conducted in the low-credibility home currency will undercut efficient financial and economic development. The problem is this: As countries that are at lower levels of development than their main trading and finance partner open their capital markets while maintaining separate currencies, constantly changing appraisals of currency risk tend to contribute to instability of capital flows, recurring debt crises, and severe and prolonged disturbances of real exchange rates. Monetary union with the world-currency partner would eliminate this exposure and preclude such disruptions. But that union will not be available until international financial integration has been prepared at microeconomic levels on all sides of the banking and financial business.