Economic and Financial Integration in Europe

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990 to 2007 period shows that EU membership significantly lowers discount rate and expected earnings growth differentials across countries. By contrast, the adoption of the euro is not associated with increased integration. Our main finding that EU membership increases integration, while euro adoption does not, remains unchanged when the sample period is extended to 2016. However, we observe that the EU membership effect is smaller between 2008 and 2016 compared to the pre-crisis period.