introduction of a new currency in order to reap the benefits of integrated financial markets in europe. thus, emu is both the european response to globalisation and at the same time the most important stimulus to european financial market integration in history. what is the current state of financial integration in europe? the current degree of financial integration in europe varies between market segments. a simple, but useful quantitative measure of financial integration is to check the validity of the law of one price. it states that in a fully integrated market risk - adjusted prices should be equal irrespective of the place of transaction. money markets nearly full integration in this sense has been achieved in the money market. this comes as no surprise as it is a prerequisite for the functioning of the single monetary policy. the integration of the euro area money market has been supported by developments in the payment systems infrastructure, most notably the establishment of the trans - european automated real - time gross settlement express transfer ( target ) system. target allows the smooth functioning of the settlement of large - value cross - border payments. this also shows that one important field of financial integration, other than markets, is infrastructure. although it is of major relevance in the current european context, i will not go into this issue in greater depth here. the unsecured segment of the money market was already almost perfectly integrated when monetary union was launched. the cross - country standard deviation of the average overnight lending rates among euro area countries fell from more than 100 base points at the beginning of 1998 to 3 base points at the beginning of 1999. this measure is now moving around 1 base point. almost perfect integration has also been established on the repo market. the eurepo index has shown cross - country standard deviations below 1. 5 base points and below 2. 5 base points for the one - month and the 12 - month maturities, respectively, since its launch in march 2002. another example of a perfectly integrated market is the overnight interest rate swap market, given a perfectly standardised product definition. the less integrated money market segments are, accordingly, those where standardisation is underdeveloped and fragmentation persists. in particular, the short - term securities market is still segmented in several market places, but the short - term european paper ( step ) initiative, led by the aci ( financial markets association ) and supported by the eurosystem, is expected to reduce the current fragmentation. bond markets government bonds the bond markets are nearly as integrated as

axel a weber : european financial integration and ( its implications for ) monetary policy speech by professor axel a weber, president of the deutsche bundesbank, at the annual general meeting 2006 of the foreign bankers ’ association in the netherlands, amsterdam, 23 may 2006. * * * introduction mr sawaya, ladies and gentlemen first of all, i would like to thank you for inviting me to your annual general meeting. looking at the list of previous speakers, i certainly feel honoured to contribute to what has now become established as a major forum of debate on european issues. i should like to use this opportunity to discuss some aspects of ongoing financial integration in europe and its implications for monetary policy. finally, i will touch upon some issues of cross - border banking integration and banking supervision in europe. talking about financial integration at a foreign bankers ’ association harbours the risk of “ carrying coals to newcastle ” – managing financial integration is, after all, your daily business. but, for that reason alone, it might be the right place to take stock of what we have achieved in europe and to give you my assessment, from a monetary policy perspective, of the successes and future challenges in this rapidly evolving field. financial integration : definition, importance, and benefits meaning, benefits, and developments of financial integration financial integration – adopting a commonly used definition – is an objective that is achieved when : ( i ) all potential participants in a market for a given set of financial instruments or services are subject to a single set of rules, ( ii ) have equal access to this set of instruments and services, ( iii ) and are treated equally when they operate in the market. financial integration in this sense can be seen as the absence of location - based discrimination in accessing the capital markets. financial integration has, in general, two main benefits : firstly, increasing the potential for higher economic growth : owing to a more efficient allocation of capital, financial integration boosts the efficiency of the financial system. an efficient financial system has a positive impact on ( noninflationary ) economic growth, as the empirical evidence shows. secondly, regionally diversified investment alternatives lead to a better diversification of risks. in this sense, the integration of financial markets can be considered as making a positive contribution to financial stability since it helps to improve the capacity of economies to absorb shocks. it is thus clear that fostering financial integration is of major relevance for general economic and specific monetary policy reasons. these benefits of integrated financial markets are the main reason for