Research Description:

Implications of the Euro Currency Unification on Security Issuance

The euro currency has had a number of significant impacts on the financial markets in the European Monetary Union (EMU). Among other advantages, EMU countries benefit from an elimination of exchange costs and risk when dealing with other member countries. Exchange rate risk, however, is still present when conducting deals with non EMU-nations, but it is reduced from the greater stability of the euro. The euro has the potential to make financial markets more liquid, which enhances the ability of market participants to issue and trade securities across borders. However, an open question to debate is the extent to which the euro has in fact led to an increase in financial market activity.

The euro had a unifying effect on the bond market in Europe, creating one EMU bond market. At its formation, the EMU bond market became the second largest (behind the US) market in volume. Each nation still issues their own government bonds, but now in a vastly different market. Additionally, the expanded currency market potentially allows corporations the ability to issue debt with potentially lower financing costs. Many of these changes can be attributed to an increased demand for these bonds caused by the greater liquidity associated with the euro.

I am researching the affects of the euro on both corporate and government issuances of fixed income securities in the EMU. Studying these affects on fixed income securities by the euro is significant, because their outcome is a large determinant of whether the euro can be deemed a success or not. While it is too early to judge the long-term success of the euro, the short to midterm success can be evaluated. If the euro proves to be successful, it has significant financial and economic implications for other currency unions, both inside and outside of Europe.