Financial Integration: Crisis and Economic Development

Financial Integration: Crisis and Economic Development

Sandra Jednak (University of Belgrade, Serbia) and Dejan Jednak (Belgrade City Markets, Serbia)
Copyright: © 2018 |Pages: 21
DOI: 10.4018/978-1-5225-4026-7.ch004

Abstract

Financial integration is an inseparable part of economic integration. It affects capital movement and economic development. Certain studies have shown that financial integration is beneficial to the economy. However, integration may be slowed down by occurrence of a crisis. Over the past 10 years, several crises have been underway. They have affected both economic development and financial integration. The aim of the chapter is to present theoretically the relation between financial integration, crisis, and economic development. An overview of EU and SEE financial integration and economic development is given. Development and integration of both regions have been slowed down due to the global and EU crisis, but there has been an improvement over the past few years. The fact is that SEE countries do not have a very developed financial integration but they meet certain prerequisites to reach a higher level of integration.
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Background

Financial Integration

Economic integration has an integral part of the global world. Due to changes, the integration has brought different benefits to economies, regions and markets. The benefits are: efficiency, competition, production and trade increase, better quality of products, mobility of inputs, coordination and coherence of policies, a rise in productivity, income and growth, a decrease in deficit of current account and fiscal budget. Economic integration is followed by financial integration, which is obtained when financial markets, institutions and infrastructure are integrated, the law of one price existence, when all the participants have the access to a single market under the same conditions, regulations, prices, etc. According to Agenor (2003), potential benefits of financial integrations are: consumption smoothing, domestic investment and growth, better macroeconomic discipline and enhanced banking system efficiency and financial stability. However, there are potential costs: concentration and possible misallocation of capital flows, volatility and procyclicality of capital flows, jeopardising macroeconomic stability and risks of entry by foreign banks. Even so, the main advantages of financial integration are: better allocation of resources, risks diversification, providing more opportunities for investments, achieving economic growth, and obtaining financial and economic development.

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