ANALYSIS reached in the European market, with the goal of as- For most goods, the overall price dispersion is much sessing whether EU markets are highly integrated eco- arger in the United States than in the European Union. omic markets where economic activities of market Moreover, price dispersion for tradable goods in the Eu articipants are highly interdependent across national ropean Union was reduced by 50 percent between 1990 borders. This question has different interrelated as- ferential in the European Union in comparison to other a Does market integration lead to a convergence of OECD countries. 4 They report that the border effect in the price formation process, and do prices of goods and the European Union is significantly lower than that ob services and production costs in the different EU coun served between Canada and the United States tries therefore converge? n Have trade flows between the states'markets been convergence among EU member states. Its studies increased and become as intense as intrastate trade? show price convergence during the 1990s, but a decel Are European capital markets becoming more in. erated convergence process since 1997. Most notably, tegrated and do interest rates in Europe converge? a As a result of increased market integration, are the tions. Moreover, price convergence among the six returns of European companies converging andfor is ounding member states is very tight the variability of their profitability decreasing relative to B Intra-EU Trade flows The following briefly reviews the results of studi Trade flows among EU member states, measured that examine these questions relative to gross domestic product increased signif cantly since the early 1990s. Moreover, trade border A Price Convergence effects. which measure whether international trade de viates from intranational trade, seems to have An indicator of the degree to which EU markets have creased substantially from the late 1980s to the integrated is price convergence, or the degree to which 1990s. This indicates that the market has become much prices for the same goods or services have come close more integrated through the single market progr together. Price convergence is expected to be more The European Commission reports steady growth of closely aligned when trade flows between the me states are high, since increased trade flows suggest that cent of EU trade. 17 Only trade in the services sector is arbitrage betwe low; further integration in the services sector would re- can occur. However, because prices also differ within a quire the more intensive application of mutual recogni en member state the determination of the degree of orice convergence among the EU member states re- quires the economist to measure price convergence be C. European Financial Market Integrati tween states on a relative basis, for example relative to the degree of price convergence in other integrate The Euro area government bond market is consid ed highly integrated. The elimination of exchar rate risk led to a significant convergence in bond yield a recent study of international price comparisons among the Euro area member states althe ough minor to evaluate the existence of price convergence in the vield spreads have persisted mainly due to still existent EU, researchers concluded that price differences within institutional and size factors. The 19 integration of the erbank market is goods, the researchers found that price differences be- tween the United Kingdom and the rest of the eU were bodies and regulators. Europe's between supervisory corporate bond grew ences gnificantly at the ample, the EU and the United States. In another study However it suffered under difficult market conditions commissioned by the U. K. government, ACNielsen con- d increased investment risks during the last twc cluded that for the bulk of goods for which comparisons could be made, there was no significant difference in Integration appears to be still in process in prices between EU member countries, as price diffe ket, the corporate loan market and ences were not larger than the spread of prices within market conditions. However, in general, the he countries. I financial sector experienced a significant If one compares the degree of price dispersion in the United States to that in the European Union, the Euro- pean Union seems to have come very close to the de- +4 A de serres et al., The width of the Intra- European E gree of price convergence found in the United States. 13 nomic Borders, OECD ECO/KP(2001)30 intemal market en update/ agen Economics, p. 17 if. I See haskel and Wolf. "From Big Macs to iMacs: What Do ning of EU Product See ACNieisen, A Report on International Price Com Adam et al. Analyse, Compare, and Apply Altermative In Copenhagen Economics: The internal market and the rel- dicators and Monitoring evant geographic market, 2003, p 21 ff tion of Capital Market Integration, Salerno 2002 TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 2C63-2069 ENA TAX 4-14-04