The fundamental determinants of financial integration in the European Union

provided by Research Papers in Economics

The Fundamental Determinants of
Financial Integration in the European Union

Jan J.G. Lemmen and Sylvester C.W. Eijffinger^*

December 1995

Abstract

This paper focuses on the fundamental determinants of the degree of financial integration in the European
Union over the period 1973-1993. Using closed interest differentials to measure the intensity of capital
controls and applying a panel data approach, we find realized inflation rates, government deficits, current
account deficits and credits to the domestic economy to be significantly positively correlated with the intensity
of capital export restrictions. In addition, low productivity in the business sector and low availability of
sophisticated deposit instruments are positively related to the intensity of capital export controls. Consequently,
remaining differences in national economic and financial structures, should be of greater interest to
policymakers.

JEL Classification: E43, F32, F36.

Keywords: Financial integration, capital controls, determinants, European Union.

^* We are grateful to Rudy Douven for generously providing the OECD Economic Outlook data diskettes. In addition, we thank
Marco Hoeberichts and an anonymous referee for helpful comments and Jeannie Bovenberg for her excellent help in editing the
paper. Address: Tilburg University, Department of Economics and CentER for Economic Research, P.O. Box 90153, 5000 LE
Tilburg, The Netherlands, E-mail [email protected]. The second author is also Professor of Economics at the College of
Europe, Bruges, Belgium. Of course, the usual disclaimer applies.

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