Are the new and old EU countries financially integrated?

Abstract:

During the last four years, the eight Eastern European countries that joined the EU in 2004 have made significant strides toward financial integration with the EU. Several pieces of evidence support this finding. First, yields on long-term sovereign bonds in accession countries have converged towards EU levels. This is true for both bonds denominated in local currency and bonds denominated in euro. Secondly, while the issuance of euro-denominated corporate bonds from accession countries is limited, yields on existing corporate bonds are in line with those in the old EU countries. Thirdly, margins in the banking sector have narrowed, which is consistent with the integration of banking markets. Finally, while country effects still play a more important role in explaining stock returns than industry effects, the continuing stock market rally in the region is consistent with financial integration into the EU.

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