PENSION FUND REFORM AND EUROPEAN FINANCIAL MARKETS a reappraisal of potential effects in the wake of EMU

Pension reform is widely seen as essential in order to defuse the difficulties EU governments would otherwise face in respect of their social security pension systems in a context of population ageing. Particularly when such reform involves funding of future pensions, it may have radical implications for European financial markets, entailing important changes in the demand for financial assets by the private sector and qualitative developments in capital markets and banking which may impinge on banks’ comparative advantages. It may thereby impact on some long-established features of EU financial markets, notably in respect of corporate finance and corporate governance. Meanwhile, the onset of EMU will strongly affect both the evolution of EU financial markets and funding; On balance, it will tend to lead the evolution of financial structures in the same direction as the effects of pension fund reform, in that both favour an increased role for securities markets and a lesser role for traditional banking. EMU will also encourage funding in various ways in and of itself. It is suggested that the forces unleashed by EMU and pension funding may act to change the European financial landscape more radically than would be the case for each alone, in the direction of a securitised financial system characterised by Anglo-Saxon market-based corporate finance and governance practices and away from "relationship banking". A number of theoretical, empirical and policy issues are raised, notably in respect of corporate finance, financial regulation and monetary policy.