The Transformation of the European Financial System

In the last two decades the European financial markets have become more market oriented. We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms, the trend is likely to benefit Southern Europe less than Northern Europe. ∗ Prepared for the 2 ECB Central Banking Conference. We thank Fang Yu for his help in collecting the data, the Center for Research in Security Prices and the Stigler Center at the University of Chicago for financial support.