Euro area equity market integration lags US ties
A new ECB Economic Bulletin article applies a structural gravity model to assess cross-border equity holdings in the euro area. The analysis finds that despite some progress, euro area equity markets remain fragmented, with integration lagging behind ties with the United States over the past decade.
Frictions ease slower within euro area
Frictions within the euro area have eased less than those between the euro area and the United States since 2014.
Intra-euro area frictions declined overall by a tax-equivalent amount of around 12 percentage points.
In contrast, frictions affecting equity holdings between the euro area and the United States fell more significantly, by around 25 percentage points.
This difference suggests a faster pace of integration of euro area equity markets with the United States over this period.
The analysis applies a structural gravity model to bilateral euro area equity holdings, providing estimates of changes in financial frictions.
This model-based framework controls for country-specific factors and time-invariant bilateral frictions, isolating structural frictions based on fundamentals and expressing them as 'tax-equivalents' for comparison across countries and over time.
The dataset covers 2014-23.
Later entrants drive intra-euro area progress
Country-level results confirm that integration progressed more strongly between the euro area and the United States than within the euro area.
The distribution of friction changes shows that barriers affecting euro area-US equity holdings declined more markedly on average.
Notably, countries that joined the EU later recorded larger reductions in intra-euro area frictions in recent years.
This contrasts with the six founding EU Member States, which experienced a more moderate decline.
This more pronounced decline among later joiners, particularly post-COVID-19, may reflect catch-up dynamics and structural changes, as these economies likely started with larger initial frictions.
Overall, the findings indicate limited progress in European equity market integration.