Capital markets will be affected at least as much as goods markets by the European Community's drive for greater economic integration. Indeed, we may say that financial integration in the EC is the key step towards the creation of the Single Market. The removal of the legal and administrative obstacles to free capital movements and the integration of financial markets raise major issues concerning the alleged trade-off between efficiency and stability and the competitiveness of different financial regulatory systems. The implications and effects go far wider than the EC, not just to the ‘European Economic Space’ but even more broadly to relations between Europe, the United States and Japan. The conference on ‘European Financial Integration’ organized by CEPR and IMI focused on these problems, which are specific to financial intermediation and have important implications for economic policy.

The reshaping of financial institutions should, first of all, not permit firms and individuals to take advantage of opportunities to circumvent taxation (see Giovannini and Hines). Otherwise competition between institutions and markets may not favour the fittest but rather those with tax advantages. Competitive fiscal deregulation should not be the major driving force of the single financial market. The international coordination of fiscal policies is also important to internalize the ‘fiscal externalities’ that occur whenever domestic and foreign government debts are traded on international markets, and thereby become close substitutes. In such circumstances, an increase in interest rates in one country results in an increase in the debt burden for all countries. Some fiscal coordination will be necessary to proceed towards monetary union, although its nature and scope will be determined in difficult negotiations (Buiter-Kletzer).