Financial Harmonization and Industrial Growth: Evidence from Europe

Ozkok, Zeynep (2012): Financial Harmonization and Industrial Growth: Evidence from Europe.

Abstract

This paper analyzes the growth effects of the Financial Services Action Plan (FSAP) of the European Commission, a set of measures and directives that aim to harmonize European financial markets. Using a panel of 25 countries and 30 industries, we find that the standard specification predicts harmonization to lower growth, though the negative effect is mitigated for industries that depend more on external finance. We then show that this seemingly surprising result is due to omitted variable bias. We would expect early adopters to bear more of the costs and experience less of the benefits of harmonization. Once we control for the relative timing of adoption, harmonization is shown to have a positive effect on growth. This finding is robust to including further controls, splitting up the sample into different groups of countries, and extending the model to a dynamic setting.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial integration; Legal, regulatory harmonization; External finance dependence; European Union; FSAP
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F55 - International Institutional Arrangements; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Alexander, K. 2002. Establishing a European Securities Regulator: Is the European Union an Optimal Economic Area for a Single Securities Regulator? Cambridge Endowment for Research in Finance Working Paper No. 7: 1 – 41

Baltagi, B. H., P. O. Demetriades, and S. H. Law. 2008. Financial Development and Openness: Evidence from Panel Data. Journal of Development Economics 89: 285 – 296

Beck, T., A. Demirguc – Kunt, and Ross Levine. 2000. A New Database on Financial Development and Structure. World Bank Policy Research Working Paper 2146, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20696167~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html (accessed: February 16, 2014)

Boyfield, K., H. Robinson, and L. Mullally. 2006. Selling the City Short? A Review of the EU’s Financial Services Action Plan. Open Europe http://www.openeurope.org.uk/Content/Documents/PDFs/fsap.pdf (accessed: February 16, 2014)

Cetorelli, N. 2001. Does Bank Concentration Lead to Concentration in Industrial Sectors? Federal Reserve Bank of Chicago Working Paper 2001 – 01

Cetorelli, N., and M. Gambera. 2001. Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data. The Journal of Finance 56 (2): 617 – 648

Cetorelli, N., and P. Strahan. 2006. Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets. Journal of Finance 61 (1): 437 – 461

Claessens, S., and L. Laeven. 2005. Financial Dependence, Banking Sector Competition, and Economic Growth. Journal of the European Economic Association 3 (1): 179 – 207

De Avila, D. R. 2003. Finance and Growth in the EU: New Evidence from the Liberalisation and Harmonisation of the Banking Industry. European Central Bank Working Paper 266

Ekinci, M., S. Kalemli – Ozcan, and Bent Sorensen. 2007. Financial Integration within EU Countries: The Role of Institutions, Confidence and Trust. NBER Working Paper 13440

Enriques, L., and M. Gatti. 2008. Is There a Uniform EU Securities Law After the Financial Services Action Plan? Stanford Journal of Law, Business & Finance 14 (1): 43 - 83

EU KLEMS Database. 2008. The EU KLEMS Growth and Productivity Accounts November 2009 Release. EU KLEMS http://www.euklems.net/ (accessed: February 16, 2014) Europa, Access to European Union Law National Execution Measures. Europa EUR – Lex, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:72006L0049:EN:NOT#FIELD_MT (accessed: February 16, 2014)

Europa. 1999. Financial Services: Commission outlines Action Plan for single financial market. Europa Press Releases RAPID, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/99/327&format=HTML&aged=1&language=EN&guiLanguage=en (accessed: February 16, 2014)

Europa. 2004. Financial Services Action Plan: Good progress but real impact depends on good implementation. Europa Press Releases RAPID, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/696&format=HTML&aged=0&language=EN&guiLanguage=en (accessed: February 16, 2014)

Europa. 2006. Evaluation of Economic Impact of the Financial Services Action Plan. Workshop on the Methodology, 1 – 30

European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: Action Plan. Communication of the Commission, 1 – 32

European Commission. 2005. FSAP Evaluation, Part I: Process and implementation. Financial Services Policy and Financial Markets Report, http://ec.europa.eu/internal_market/finances/docs/actionplan/index/070124_part1_en.pdf (accessed: February 16, 2014)

European Commission. 2010. Transposition of Financial Services Action Plan. http://ec.europa.eu/internal_market/finances/actionplan/transposition/database/austria_en.htm (accessed: February 16, 2014)

European Commission. 2011. European Financial Stability and Integration Report 2010. European Commission Staff Working Paper

European Commission. 2013. Application to EU Law. http://ec.europa.eu/eu_law/infringements/infringements_260_en.htm (accessed February 16, 2014)

Eurostat. 2011. Bilateral Exchange rates and Former euro area national currencies exchange rates database, The Statistical Office of the European Union (accessed: May 30, 2011)

Evans, P., I. Hasan, and A. Lozano-Vivas. 2008. Deregulation and Convergence of Banking: The EU Experience. Finnish Economic Papers 21 (2): 104 – 117

Fisman, R., and I. Love. 2003. Financial Dependence and Growth Revisited. NBER Working Paper Series 9582

FSA. 2003. Completing the Financial Services Action Plan. http://www.fsa.gov.uk/library/communication/speeches/2003/sp131.shtml (accessed: July 16, 2014)

FSA. 2010. European. http://www.fsa.gov.uk/about/what/international/european (accessed: February 16, 2014)

Gual, J., and D. J. Neven. 1992. Deregulation of the European Banking Industry (1980 – 1991). CEPR Discussion Papers 703

Gual, J. 2003. The Integration of EU Banking Markets. Universidad de Navara IESE Banking School Working Paper 504

Guiso, L., T. Jappelli, M. Padula, M. Pagano, P. Martin, and P. O. Gourinchas. 2004. Financial Market Integration and Economic Growth in the EU. Economic Policy 19 (40): 525 – 577

Gupta, N., and K. Yuan. 2003. Financial Dependence, Stock Market Liberalizations, and Growth. William Davidson Working Paper 562

Gupta, N., and K. Yuan. 2009. On the Growth Effect of Stock Market Liberalizations. Review of Financial Studies 22 (11): 4715 – 4752

Hartmann, P., A. Maddaloni, and S. Manganelli. 2003. The Euro Area Financial System: Structure, Integration and Policy Initiatives. European Central Bank Working Paper 230

HM Treasury, The Financial Services Authority, and the Bank of England. 2003. The EU Financial Services Action Plan: A Guide. 1 – 24

HM Treasury, The Financial Services Authority, and the Bank of England. 2004. After the EU Financial Services Action Plan: A new strategic approach. 1 – 48

HM Treasury, The Financial Services Authority, and the Bank of England. 2004. The EU Financial Services Action Plan: Delivering the FSAP in the UK. 1 – 48

Holmstorm, B., and J. Tirole. 1997. Financial Intermediation, Loanable Funds, and the Real Sector. Quarterly Journal of Economics 112 (3): 663 – 691

Jayaratne, J., and P. Strahan. 1996. The Finance-Growth Nexus: Evidence from Bank Branch Deregulation. Quarterly Journal of Economics 111 (3): 639 – 670

Jayaratne, J., and P. Strahan. 1997. The Benefits of Branching Deregulation. Federal Reserve Bank of New York Economic Policy Review 3 (4): 13 – 29

Jayaratne, J., and P. Strahan. 1998. Entry Restrictions, Industry Evolution and Dynamic Efficiency: Evidence from Commercial Banking. Journal of Law and Economics 41 (1): 239 – 274

Kalemli – Ozcan, S., E. Papaioannou, and J. L. Peydro. (2010). What Lies beneath the Euro’s Effect on Financial Integration? Currency Risk, Legal Harmonization, or Trade? Journal of International Economics 81 (1): 75 – 88

Kalemli – Ozcan, S., E. Papaioannou, and J. L. Peydro. (2013). Financial Regulation, Financial Globalization and the Synchronization of Economic Activity. Journal of Finance 68 (3): 1179 – 1220

Klenow, P. J. 1998. Ideas versus rival human capital: Industry evidence on growth models. Journal of Monetary Economics 42: 3 – 23

Kroszner, R. S., and P. Strahan. 1999. What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions. Quarterly Journal of Economics 114 (4): 1437 – 1467

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1997. Legal Determinants of External Finance. Journal of Finance 52 (3): 1131 – 1150

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1998. “Law and Finance.” Journal of Political Economy, 106 (6), 1113 – 1155

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1999. The Quality of Government. Journal of Law, Economics and Organization 15 (1): 222 – 279

La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. 2008. “The Economic Consequences of Legal Origins.” Journal of Economic Literature 46 (2): 285 – 332

London Economics. 2002. Quantification of the Macro-Economic Impact of Integration of EU Financial Markets. Executive Summary of the Final Report to the European Commission – Directorate-General for the Internal Market, 1 – 9

Malcolm, K., M. Tilden, and T. Wilsdon. 2009. Evaluation of the economic impacts of the Financial Services Action Plan. European Commission Internal Market and Services Final Report, 1 – 243

Morgan, D. P., B. Rime, and P. Strahan. 2001. Bank Integration and Business Volatility in the U.S. Federal Reserve Bank Staff Report 129

Morgan, D. P., and P. Strahan. 2003. Foreign Bank Entry and Business Volatility: Evidence from U.S. States and Other Countries. NBER Working Papers – 9710

Morgan, D. P., B. Rime, and P. Strahan. 2004. Bank Integration and State Business Cycles. The Quarterly Journal of Economics 119 (4): 1555 – 1584

Rajan, R. G, and L. Zingales. 1998. Financial Dependence and Growth. American Economic Review 88 (3): 559 – 586

Spiegel, M. M. 2004. Monetary and Financial Integration: Evidence from the EMU. FRBSF Economic Letter 20: 1 – 4

Strahan, P. 2002. The Real Effects of U.S. Banking Deregulation. Wharton Financial Institutions Center Working Paper Series 02 – 39

Timmer, M., T. van Moergastel, E. Stuivenwold, G. Ypma, M. O’Mahony, and M. Kangasniemi. 2007. “EU KLEMS Growth and Productivity Accounts, Version 1.” EU KLEMS, 1 – 57 Timmer, M. P., M. O’Mahony, and B. van Ark. 2007. EU KLEMS Growth and Productivity Accounts: Overview November 2007 Release. EU KLEMS, 1 – 18

UniCredit Group Forum on Financial Cross-Border Groups. 2009. Cross-border banking in Europe: What Regulation and Supervision? UniCredit Group Discussion Paper, 1 – 27

Worldwide Governance Indicators. 1996 – 2009. “Aggregate Governance Indicators.” The World Bank Group. http://info.worldbank.org/governance/wgi/index.aspx#home (accessed: February 16, 2014)