IT STARTED QUIETLY, when it seemed that the European unification effort had inexorably run out of steam. It grew slowly inside the European Community, more for lack of opposition than because of strong support from any member state. Now it is one of the most talked about issues not only in Europe, but also in the United States and Japan. Europe 1992 is, at the same time, a source of excitement, fear, and skepticism. In the area of financial markets, however, the most common response to 1992 is probably confusion. What is Brussels really promising? How is it going to achieve its goals? How likely is its success? What are the implications for countries outside the Community? Will 1992 make any difference after all? To these and other such questions, the answers commonly given are either essentially political-being positive or negative depending on which side of the Atlantic the opinion comes from or strictly technical. The truth is that the issue is so complex in its economic, institutional, and regulatory ramifications that it is impossible to predict exactly what will happen. The aim of this paper is to organize and put into perspective, without pretending to be exhaustive, the facts that are crucial to understanding the impact of the European integration project on the financial markets. The first section surveys the current world financial market. In particular, it summarizes the differences across national markets, with special attention devoted to regulations affecting foreign direct investment in financial services and the cross-border trade in securities (capital controls). The next section explains the goals of the European integration, its timetable, and its progress to date. Finally, I review and evaluate the European Commission’s estimates of the benefits deriving from the liberalization of the capital markets and discuss some important unresolved issues.
