The degree of integration in the euro area varies considerably across different market segments. The euro money market is already highly integrated, as it is closest to the single monetary policy and supported by area-wide large-value payment systems, such as TARGET or EURO 1. An important exception is the market segment for short-term debt securities, which shows some fragmentation owing to the prevailing differences in market standards and practices. The bond markets are also relatively well integrated. For instance, the cross-border holdings already constitute around 40% of the total of the long-term debt securities held by monetary financial institutions. Equity markets are less advanced than bond markets but show signs of increasing integration. For example, the proportion of variance of equity returns explained by euro area shock is around 38% when measured over the period of 1999-2007. Still relatively fragmented securities clearing and settlement systems continue to constitute obstacles to the further integration of securities markets in Europe. In general, wholesale and capital market-related activities of banks show solid signs of increasing integration, while retail banking and the underlying retail payment systems have remained more fragmented, as has been the case for mortgage markets. Finally, as was discussed in detail in an ECB staff presentation earlier during this Symposium, financial markets in the member states that joined the European Union in 2004 are significantly less integrated than those in the euro area.

Needless to say, these efforts have to be pursued in the future, as the European Commission stressed yesterday while acknowledging the progress France had already made. As regards the structural transformation, the government has decided to act rapidly by passing legislation by decree in the first months of its mandate. A substantial labour market reform was approved last summer and has already been implemented. It provides more flexibility to firms by giving social partners more room for negotiation and reducing uncertainties regarding contract terminations. Moreover, measures were announced to promote employment by reducing labour costs: the transformation of the CICE – credit tax for competitiveness and employment – into a permanent reduction of social contributions, and the transfer of social contributions financing health and unemployment insurance to a flat income tax with a larger base (CSG). In addition, measures have been taken to reduce the tax burden on investment; the abolition of wealth tax on all financial investments, the reduction of the corporate income tax towards the EU average or the flat tax at 30% on capital income. By supporting equity financing, these measures should hopefully enhance the creation and development of firms, especially innovative SMEs. Funds will be devoted to vocational training. A forthcoming reform of vocational training and apprenticeship is expected next year, which is badly needed as the French economy is still experiencing labour shortages despite high unemployment. These reforms should have a significant impact on growth and employment in the long term. Page 3 sur 5  II.