The fundamental determinants of financial integration in the European Union

21

by the international financial community on particular countries. The paper finds relatively high but
insignificant political risks in Belgium, Finland, Italy and Sweden (see regression E). This is in contrast
with Alesina, Grilli and Milesi-Ferretti (1994) who find significant political risks for a sample of 20 OECD
countries. These insignificant political risks are basically attributed to political instability approximated
by significant government changes. This is in accordance with Alesina, Grilli and Milesi-Ferretti (1994)
who find that capital export controls are more likely imposed in countries with significant government
changes.

In contrast with previous research, this paper highlights the impact of (differences in) national economic
and financial structures on financial integration. With capital controls increasingly being eliminated, we
expect the underlying characteristics of economic and especially financial market structure to be major
determinants of remaining closed nominal interest rate differentials in the future. Monetary and fiscal policy
in the EU are expected to become increasingly dependent on varying economic and financial structures,
rather than on financial integration.

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