What Lies Beneath the Euro's Effect on Financial Integration? Currency Risk, Legal Harmonization, or Trade?
Elias Papaioannou, Jose Luis Peydro and Sebnem Kalemli-Ozcan ,
( 81 )
Journal of International Economics

Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro’s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro’s impact on financial integration is primarily driven by eliminating the currency risk.

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