Establishing a European securities regulator: is the European Union an optimal economic area for a single securities regulator?

Abstract

The paper’s purpose is to address the economic, institutional, and legal issues confronting the establishment of a more centralised approach to EU securities regulation and to suggest that the theory of optimum currency areas can be used as a model to assess the economic benefits and costs of further centralisation of securities regulation in the European Union. The European Union’s Financial Services Action Plan seeks to achieve an integrated market in financial services in order to accomplish the economic and political objectives of the Treaty of Rome. The FSAP is premised on the notion that the adoption of legal and regulatory measures to achieve liberalisation in cross-border trade in financial services will also achieve integration of EU financial markets. This paper argues that liberalisation of financial markets does not necessarily lead to integration of financial markets. Furthermore, it argues that the institutional design and scope of financial regulation should be based, in part, on the extent of integration in the financial market. That is, the domain of the regulator should be the same as the domain of the market. European capital and financial markets remain fragmented and segmented. This paper argues therefore that, until EU financial markets become more integrated, a single EU securities regulator would not be an efficient or effective institutional model for EU securities markets. In other words, at present, the EU is not an optimal economic area for a single securities regulator.