in the european bond market, two groups of debtors account for the large majority of the outstanding stock of debt securities, namely public sector and financial institutions. the amount of outstanding public sector bonds in the euro area is more than 3 trillion euros, somewhat less than 60 % of euro area gdp. while that amount provides the market with depth and liquidity, you will not be surprised to hear that i would like to see this ratio to gdp coming down. the amount of public debt in the euro area is still too high. for a stable euro it is also – though not solely – of vital importance that governments should keep their commitment to reduce their indebtedness to more sustainable levels as agreed in the stability and growth pact. this would support monetary policy, create room in government budgets to accommodate periods of unfavourable economic developments and make it possible to bear the burden on the budget resulting from the imminent ageing of the population. reduced borrowing by the public sector would also leave more room for the private sector to issue debt securities. in terms of issuance of bonds, the euro area financial sector ranks second to the public sector in euro area capital markets. and indeed, longer - term debt financing by the corporate sector in europe still takes place predominantly via financial intermediaries, which partly fund themselves through capital markets. for this part, the european capital markets do not allocate capital directly between savers and investors, but rather through intermediaries. in the united states, where there is a very active corporate bond market, the situation is quite different, with bank loans only forming a major source of financing for small and medium sized companies. there are a number of reasons why corporate sector financing in the euro area capital markets is likely to benefit from integrated markets in the future. firstly, as i mentioned earlier, the depth and liquidity of capital markets are important for capital markets to perform their functions efficiently. with integrated markets we will see deeper and more liquid markets than was the case beforehand in any of the euro area countries. private sector issuers in general and companies in particular are by definition heterogeneous and the development of an efficient market for corporate bonds for various types of companies and within various maturity ranges requires the existence of a large market. in order to guarantee a competitive market price for a given corporate bond, it is necessary for there to be a large number of bonds which share similar characteristics in the market. secondly, for large companies in particular, it makes sense from the

mr duisenberg discusses the role of capital markets and financing in the euro area speech by willem f duisenberg, president of the european central bank, at the waarborgfonds sociale woningbouw in utrecht, the netherlands, on 14 june 1999. introduction the european capital markets have gone through a major structural change with the introduction of the euro. eleven national markets have received a strong impetus to integrate into a single euro area capital market. in addition, the process of integration seems to go beyond the euro area, with links being forged with other european markets. capital markets represent a fundamental element of the financial system of any modern economy and they play an important role in the allocation of capital within the economy. therefore public authorities responsible for economic policy as well as private sector agents who are active in the capital markets have a vested interest in capital markets that are both efficient and stable. today, i would first like to discuss the role of the capital markets and the advantages of possessing deep and liquid capital markets. secondly, i will turn my attention to the effects on capital markets that we have already seen since the introduction of the euro, and the process of further integration in capital markets that is expected to continue in the future. the emphasis of this discussion will be on the euro area bond markets. thirdly, i will focus my attention on the important issue of how these developments which are expected to take place are likely to shape financing in the european capital markets and in particular how they might affect financing through the euro area bond markets. finally, i will turn my attention to the role that public authorities have already played and will play in this process in the future. the role of efficient and stable capital markets turning first to the role of capital markets, it might be asked why one should be interested in the depth and liquidity of capital markets at all. after all, capital markets are mostly in the business of trading in bonds and equities that have been issued in the past. the actual financing or allocation of new capital represents only a fraction of the daily turnover of capital markets. indeed, from the point of view of allocating capital across productive purposes the secondary market is not of direct relevance. and as you know, in most financial systems there has been a phase in which markets have been more or less non - existent and financing has taken place through intermediaries, banks. however, deep and liquid secondary markets play a very important indirect role for financing in capital markets. first of all