financial developments, for example the ratio of total market capitalisation ( including bank assets ) to gdp. chart 5 shows that the size of the equity and debt securities markets in the euro area was about 56 % of that of the united states, reflecting the greater reliance of euro area firms on bank financing. other indicators confirm that the depth and liquidity of the us financial markets are greater than that of the euro area. at the same time, the efficiency of the euro area ’ s financial system has improved significantly since the adoption of the euro. indeed, the euro has contributed to the integration of financial markets in the euro area, which has increased their liquidity and efficiency, and made the euro more attractive to international investors. policy initiatives by the european commission and the ecb aim at fostering further integration and the development of the euro area ’ s financial system, which will support the international use of the euro and will have positive feedback effects on the development and efficiency of the euro area ’ s financial markets. thus, the further integration and development of the euro area financial system and the internationalisation of the euro are processes that can be expected to be mutually reinforcing. the process of financial globalisation and the rapid integration of emerging markets into the world economy, as illustrated in chart 6, can also be expected to foster the development of european financial markets and, other things being equal, could support the international use of the euro. the abovementioned arguments should not lead to the conclusion that the expected positive effects of a number of determinants of the euro ’ s international role are likely to lead to a significant and abrupt increase in the euro ’ s relative importance as an international currency. there are other determining factors, and the effects of some of them imply that changes in the international use of a currency are likely to be very gradual. let me point to two such factors. first, as historical experience suggests, inertia and the advantages of incumbency in various markets imply that change in the international role of a currency is likely to be very gradual. network externalities favour the use of one currency for certain financial and real sector transactions. for example, the us dollar serves as a vehicle currency in foreign exchange markets, with most trades executed via the us dollar, even when neither of the two currencies exchanged is the us dollar, mainly due to the superior liquidity and thus lower costs involved in trading against the us dollar than for other currency pairs. similarly, prices in international commodity

about 28 % at the end of 2007. similar conclusions are reached with regard to the evolution of the share of the euro in international debt security markets, as shown in chart 3. the share of the euro in the “ narrow measure ” of international debt securities ( which excludes debt securities issued in the home currency ) increased to about 32 % at the end of 2007 from around 19 % at the end of 1998. the increase in this share is less pronounced, although still significant, after adjusting for valuation effects. one special characteristic of the international use of the euro is that, so far, it has been concentrated in regions that are geographically close to the euro area. this fact reflects political, institutional and economic factors. it is not surprising that non - euro area eu countries account for a significant part of euro - denominated debt by non - residents or that the degree of currency substitution is high in the new eu member states that have not yet adopted the euro or in the eu candidate and potential candidate countries. moreover, some 29 countries 2 that use the euro as a reference currency for their exchange rate policies are close to the euro area. chart 4 illustrates the regional dimension of the international role of the euro. the share of the euro in cross - border loans increased among the “ old ” non - euro area eu countries ( uk, denmark sweden ), but decreased in other parts of the world. at the same time, the rise in the share of the euro in international debt securities has also been most pronounced in the new eu member states and the other non - euro area eu countries. to sum up, over the past ten years, the euro has established itself as the second most important international currency after the us dollar. its global role in international trade and global financial markets is greater than that of its legacy currencies combined. its international use has gradually increased over time in most market segments but, in certain markets, it has remained relatively stable in recent years, when adjusted for valuation effects. constant exchange rate figures are expressed in exchange rates prevailing at the end of the last available observation. as a result, current and constant exchange rate figures are by construction the same for the last observation. 40 countries, if we include the countries of the cfa frank zone in western africa. the international role of the euro area is especially strong in neighbouring regions with special political and economic ties to the european union. iii. determinants of and prospects for the international role of the euro what are the prospects for