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Meyer, Thomas
Year of Publication: 
Series/Report no.: 
Ezoneplus Working Paper 5
Capital markets have undergone massive changes in the past decade; in Western Europe but of course more fundamentally in the Central and Eastern European Countries (CEEC). The euro has fostered the transformation of financial systems toward a more market based approach. Its impact in Eastern Europe will be even stronger. To ensure the success of EMU an active and open-market stance is required. The euro increases the cost of failure and thus provides a strong incentive to comply. Repercussion to current members will be stronger, hence, they will not allow any substantial deviation from the consensus economic policy. A common currency fosters capital market integration, liberalisation, deregulation, and consolidation of financial services throughout the currency area. Competition increases and will lead to higher efficiency. More efficient financial markets improve the allocation of capital and hence contribute to long-term growth and prosperity. The main vehicle is more and better investments. In the short run it will be important to avoid imbalances which might destabilise the CEE applicant states. Capital inflows to the CEEC might overshoot a sustainable level and be channelled into unprofitable investments. Eventually this money may be withdrawn all of a sudden undershooting the long-term level and depriving the applicant states of financial resources and leading to crisis. A prudent treatment of these flows requires a developed capital market, something the CEEC are only about to acquire. Hence, special attention should be given to the evolution of financial institutions and a sufficient regulatory framework. Applicant states should use foreign capital flows to promote capital market development, in the form of foreign entry of banks. The adoption of the acquis communautaire and the Stability Pact provides a tested institutional framework and macroeconomic stability. Both support financial development.
Capital Markets
Transition Economies
Document Type: 
Working Paper

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