Working Paper: CEPR ID: DP3865
Authors: Raghuram G. Rajan; Luigi Zingales
Abstract: In the last two decades the European financial markets have become more market-oriented. We analyse 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.
Keywords: banking system; finance; development; financial markets
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Integration of European financial markets (G15) | Expansion of arms-length financing (G32) |
| Technological innovation (O39) | Expansion of arms-length financing (G32) |
| Larger, more formally organized firms (L22) | Better performance of arms-length financing (G32) |
| Better legal enforcement (K40) | Better performance of arms-length financing (G32) |
| Smaller, less transparent environments (F12) | More effective relationship-based financing (G32) |
| Political coalition between interventionist governments and large banks (F33) | Suppression of arms-length market development (R38) |
| Establishment of a sound legal and regulatory framework (G38) | Benefits of arms-length markets (G19) |
| Political support for market-oriented reforms (E69) | Outcomes of financial transitions (P34) |
| Lack of serious reforms (E69) | Uniform distribution of benefits of market-oriented reforms (D39) |