jean - claude trichet : major issues related to the process of european financial integration – the regional and global perspective keynote luncheon remarks by mr jean - claude trichet, president of the european central bank, at the conference “ transatlantic roundtable on finance and monetary affaris ”, at the invitation of the european institute, washington, dc, 13 april 2007. * * * introduction ladies and gentlemen, i would like to thank the european institute for inviting me to share with you some thoughts on the financial integration process, both within the euro area and between the euro area and the rest of the world. i will structure my remarks into two parts. in the first part, i will elaborate on the regional dimension of european financial integration. after stressing the importance of financial integration for economic growth in europe, i will highlight some of the main achievements of european financial integration thus far, as well as the challenges still facing us. seen from an international perspective, the european process of regional financial integration should not be misunderstood as creating an isolated fortress, but on the contrary as a tool for european financial markets to become better integrated with global markets. in the second part of my speech, i will therefore provide some evidence illustrating that the financial links of the euro area with the rest of the world are already particularly strong in comparative terms. i will also show that the advent of the euro has given further impetus to such financial linkages, which now also increasingly include capital flows to and from key emerging market economies. the regional perspective implications of european financial integration for economic growth financial integration is of key importance for the european central bank ( ecb ), given its relevance for the conduct of the single monetary policy : a well - integrated financial system enhances the smooth and effective transmission of monetary policy impulses throughout the euro area. today, i would like to highlight a further implication of financial integration, namely that it raises the economy ’ s potential for stronger non - inflationary economic growth. generally speaking, financial systems serve to channel funds from those economic agents that have a surplus of savings to those with a shortage ; and to trade, hedge, diversify and pool risks. these functions are facilitated by financial integration. as a result, there is a better sharing and diversification of risk and a greater potential for stronger non - inflationary economic growth. regarding risk sharing, it is interesting to note that in the us, according to a particularly interesting research, capital markets would smoothe out 39 % of the asymmetric shocks

to gross state product ( the equivalent of our gdp ), the credit channel would smoothe out 23 % of such shocks and the federal government, through the fiscal channel, 13 %. 25 % of the shocks would not be smoothed out. 1 hence in the united states financial markets and financial institutions would contribute 62 % to the absorption of state idiosyncratic shocks. the effect is very substantially higher than the effect of the federal budget. we see from the us example that the financial channel can be much more important than the fiscal channel and that is a particularly important additional reason to speed up financial integration in europe. financial integration is also very important for stimulating economic growth in europe via its impact on the development of the european financial system. financial development refers to the process of see p. asdrubali ; b. sorensen ; o. yosha, “ channels of interstate risk sharing : united states 1963 - 1990 ”, the quarterly journal of economics, vol. 111, no. 4, november 1996, pp. 1081 - 1110. financial innovation, and to the institutional and organisational improvements in a financial system that reduce asymmetric information, increase the completeness of markets, add possibilities for agents to engage in financial transaction through ( explicit or implicit ) contracts, reduce transaction costs and increase competition. progress in financial development can obviously also occur in perfectly integrated markets. therefore, by speeding up the reallocation of capital from declining to evolving and promising industries – the schumpeterian process of “ creative destruction ” – both financial integration and financial development positively influence the efficiency of a financial system, ultimately leading to a higher potential for economic growth. the introduction of the euro has already brought about important benefits resulting from increased financial integration. and the process of european financial integration and development is still ongoing : a research study by london economics estimates the benefits of the full integration of european bonds and equity markets to be around 1 % of gdp growth over a ten - year period, or approximately €100 billion. 2 this brings me to the next point i would like to make, namely the identification of major achievements and challenges of european financial integration. achievements and challenges of european financial integration let me first draw your attention to a new report entitled “ financial integration in europe ”, which the ecb published for the first time just three weeks ago. 3 the main purpose of this report, which will become an annual publication, is to contribute towards the advancement of european financial integration and to raise public awareness of