The European Union, the Euro, and equity market integration

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on both economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990-2007 period shows that membership in the EU significantly lowered discount rate and expected earnings growth differentials across countries. In contrast, the adoption of the Euro was not associated with increased integration. Our results do not change when the sample is extended to include the recent crisis period.