EU stock market integration: Policy impact and drivers

Abstract

This study examines the dynamics of EU stock market integration (ESMI) by disentangling it from global stock market integration (GSMI). Using ESMI’s strength relative to GSMI, we assess how EU policies, financial crises, and cross-country disparities in economic, business, and market conditions influence integration, employing both machine learning and econometric models. The results indicate that ESMI is predominantly influenced by GSMI. Among potential drivers, differences in expected corporate performance across EU member states, i.e., expectation disparity, are the most significant. In contrast, EU-level policies exhibit no or only short-lived effects. Brexit and the COVID-19 pandemic appear to increase ESMI through synchronized market reactions. These findings suggest that EU financial integration is heavily shaped by global forces and internal asymmetries, thereby raising questions about the long-term effectiveness of EU integration policies.