The progress achieved in developing a single market in financial services has to be seen in the wider context of globalisation. In particular the introduction of new technologies and advanced applications in the international financial system has created a new dimension of competition that removes geographical barriers. It has transformed traditional markets in specialised and segmented markets, and changed the market structure by removing the time dependence of the transactions performed.
Financial markets have responded to these changes by developing a cross-border presence and operating on a world-wide basis. Nevertheless the need for a harmonised legislative framework is increasing. Most merger activities taking place recently, such as stock exchange mergers, are moving from a situation of geographical fragmentation towards one of functional segmentation, in which the specialisation is increasing its relative importance.
This process implies de-regulation and a subsequent re-regulation carried out not at a national but at an international level. The developments in the financial sector are wrongly defined as an outcome of liberalisation. However, technological changes and the trend in macroeconomic variables have also played an important role.
In the early 1960s, European Union actions were not successful in efforts to liberalise the financial sector, while the ambition to uniform financial services in the Community has boosted the creation of a single market. However, in all countries the financial sector is more regulated than other sectors. Financial services affect all economic performance and may have contagious effects on other economic sectors. Furthermore, banking and insurance activities gain strategic importance in relation to their geographical location. The latter underlines the need to reduce of a nation-based focus. For this reason the current trend can be defined as financial transnationalisation.
A single market in financial services has been under construction since 1973, underlying its importance as motor for growth and job-creation in the European Union. The key objective has been to develop a prudentially sound integrated pan-European financial services and capital market by 2005.
The major aims are:
to reach a secure environment in which all consumers and investors may derive the maximum benefit and better allocation at reduced capital cost;
to strengthen the European economy and the inward investment potentialities; and
to improve entrepreneurship and knowledge economy.
The introduction of the Euro has brought the opportunity to reduce to a minimum the cost of capital and financial intermediation. Nevertheless, the Union's financial markets still faces a partly fragmented and partly segmented system due to a number of factors:
the existence of a high number of independent national stock exchanges;
inefficient and expensive clearing and settlement systems;
the growth of new forms of issues, such as ATS1 or ECNs2, which imply the need for a different consumer protection framework, e-commerce secure environment provisions and fraud prevention rules; and
the existence of different national regulators and therefore different application of the same country rule.
Recognising the changing financial environment, in June 1998 the Cardiff Council invited the Commission to endorse a "Framework of Action" in order to improve the creation of the single market for financial services. In response to the mandate, a Communication3 was endorsed by the Commission identifying a "range of issues calling for urgent action to secure the full benefits of the single currency and an optimally functioning European financial market4".
Politically, this major objective has been supported at various European Councils5. At the Lisbon European Council the deadline for the implementation of the Financial Services Action Plan was set for 2005 and the following five priorities were set:
eliminating barriers to pension fund investment and undertakings of collective investment in transferable securities;
enhancing comparability for companies' financial statement and their mutual recognition internationally;
review of the Investment Services Directive in order to enable investment service providers to operate cross-border without confronting overlapping administrative formalities and impediments ;
During the Summit the increasing importance of co-operation in order to achieve agreements on e-commerce and to introduce redress mechanisms and dispute resolution systems was emphasised. Enhancement of the legal framework will boost consumer confidence. Rapid progress on the pending legislation on the distance selling of financial services and in the field of take-over-bids was urged. Furthermore a deadline of 2003 was set even for the Risk Capital Action Plan.
One of the instruments currently available, and implemented by economic agents and public authorities in order to assess the changes and achievements reached in a specific sector and determine its relative performance, is benchmarking. In particular this is implemented as an instrument for assessing the level of competitiveness in the EU within different economic entities such as sectors, regions, companies, etc.. It is based on two elements: identifying the cause of different competition structures; and the improvements needed. For the first goal, social-economic indicators are implemented, such as social behaviour information, market structures; commercial practices etc. For the second, the relative best practise is identified as an instrument for mobilising agents and resources to define the future trend of development.
The aim of this paper is to examine the possible effects of the current development of financial markets on job creation and growth potential in the Community. It is divided into two parts, following the general approach, separating developments in the wholesale financial markets from the retail sector. This sub-division permits separation of the different features of the operators acting in the two market sectors. The third part focuses on the effect of financial markets on the development of a risk capital market, one of the major sources of employment creation.