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The European Union (EU) is arguably a global economic power. Internal trade within the EU accounts for about 19% of the total global trade (Bekaert, Harvey, & Lundblad, 2005, p. 54). Additionally, the EU is the largest trading partner of China, Russia, and the United States, which makes the Union a leading player in the global economy.
Currently, the single market of 15 countries has adopted a single currency, the euro, and has been successful in removing internal trade barriers. Among the spectacular successes of the EU is the full integration of money, and bond markets, of the member countries. This has expanded the capital markets, which has led to a reduction in the cost of capital within the Eurozone.
However, contrary to expectations, the economic growth within EU is low relative to non-EU countries. The growth performance within EU is variable with some countries such as Greece and Italy experiencing recessions and high inflation.
Additionally, large differences in inflation within the Eurozone coupled with similar nominal rates create a large variation in real interest rates. This has affected employment across the EU region.
The European Central Bank has responded through financial market reforms. This aims at increasing competition, efficiency, and further political integration. The strategies also aim to increase accessibility of financial instruments to national governments and remove internal trade barriers. This will attract more capital from domestic and foreign investors.
In addition, fiscal and monetary coordination by the ECB will help reduce distortions created by variable interest rates. The price and wage-setting strategy will reduce the current inflation in some EU-member states, enhance price stability, and promote effective resource allocation to spur growth.
Improved output and domestic demand will attract foreign investment into Eurozone. As a result, the welfare benefits of these structural reforms will enhance public acceptance and promote further integration.
Reference
Bekaert, G., Harvey, C., & Lundblad, C. (2005). Does Financial Liberalization Spur Growth? Journal of Financial Economics, 77 (1), 53-55.
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