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43 J. Common Mkt. Stud. 1 (2005)

handle is hein.journals/jcmks43 and id is 1 raw text is: JCMS 2005 Volume 43. Number 1. pp. 1-11 The Euro and Financial Market Integration* HOSSEIN ASKARI The George Washington University JOYDEEP CHATTERJEE University of Pennsylvania Abstract One of the projected benefits of the euro was to be a unified capital market. The cost of capital would be lower and this, coupled with the larger market, would motivate large EU entities to satisfy their financing needs within the euro area. Our results support the expectation that the financial markets of the euro area countries would become more unified with a lowered cost of capital, especially for the less financial- ly credible countries. It appears, however, that the benefit of a lower cost of capital has also accrued to the three EU countries that did not adopt the euro. Introduction The euro was adopted for economic as well as political reasons. It was a major project undertaken by the European Union (EU) to raise longer-term economic growth and living standards and to consolidate political stability in the euro area. The launch of the euro on 1 January 1999 was expected to remove exchange rate risks within the euro area, cut transactions costs and further encourage firms to trade across national borders, thereby providing impetus to trade, investment and employment. The adoption of the Stability and Growth Pact (SGP) was designed to ensure a similar fiscal stance across * The authors thank Mufaddal Baxamusa and Kevin Barnes for their assistance in securing some of the data and to an anonymous referee for a number of constructive and helpful comments. C Blackwell Publishing Ltd 2005 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA