Financial Integration within EU Countries: The Role of Institutions, Confidence, and Trust

We investigate the degree of financial integration within and between European countries. We construct two measures of de facto integration across European regions to capture "diversification" and "development" finance, in the language of Obstfeld and Taylor (2004). We find evidence that capital market integration within the EU is less than what is implied by theoretical benchmarks and also less than what is found for U.S. states. We ask why this is the case. Using country-level data for economic institutions, we find that these are not able to explain differences between countries. Using regional data from the World Values Surveys, we investigate the effect of "social capital" on financial integration among European regions. We find regions-where the level of confidence and trust is high-are more financially integrated with each other.