The EMU Effect on Stock Market Developments and Economic Growth

There is overwhelming evidence that integration of Euro area equity markets has significantly increased since the introduction of the Euro in 1999. Although the elimination of currency exchange risk and the high degree of integration probably have substantial positive effects on diversification, risk sharing, cost of capital, and the competitiveness of the EMU economies, their implications for financial developments and economic growth are somewhat ambiguous.

This paper examines the impact of the Euro on stock market development and economic growth. We use four measures of stock market development namely market capitalization, liquidity, volatility, and integration with world capital markets. To assess the short- run and the long- run impact of equity market development on economic growth, we conduct cointegration analyses and ECM for data from eleven Euro countries, four non-Euro countries and three emerging countries over the period 1989 -2010. We found that The Euro enhances economic growth in all Euro countries, even those with already well developed financial markets. The evidence is robust to a variety of controls and robustness checks.