This article aims to provide insight into the future of financial markets and regulation in order to define what would be the best strategy for Europe.
First the authors define the potential changes in financial markets and then the tools available for the regulator to tame them. Finally, they build five scenarios according to the main evolutions observed on the financial markets and on the tools used by the regulator to modify these trends.
Among the five scenarios defined, two present highly unstable features since the regulator refuses to choose between financial opening and independently determining how to regulate finance in order to preserve financial stability. Three of them achieve financial stability. However, they are more or less efficient or feasible. In terms of market efficiency, the multi-polar scenario is the best and the fragmentation scenario is the worst, since gains of integration depend on the size of the new capital market. Regarding sovereignty of regulation, fragmentation is the best scenario and the multi-polar scenario is the worst, because it necessitates coordination at the global level which implies moving further away from respective national preferences. However, the more realistic option seems to be the regionalisation scenario: this level of coordination seems much more realistic than the global one; the market should be of sufficient size to enjoy substantial benefits of integration. Nevertheless, the “European government” might gradually increase the degree of financial integration outside Europe in line with the degree of cooperation with the rest of the world.
Foresight studies on financial markets and regulation are quite rare. This may be explained by the difficulty to forecast what will be their evolution in the coming decades, not least because finance is fundamentally unstable. This paper provides a framework to consider what could be the best strategy of regulators in such an unstable environment.
JEL classification – E44, F36, G18, G28The authors would like to thank Kern Alexander, Francis Cripps, Leonard Field, Yoriaki Fujimori, Robert Guttmann, Louise Hanzlik, Tarik Mouakil, Michiya Nozaki, Pascal Petit and the AUGUR project members for their helpful comments on an early draft. All remaining errors are the authors'.
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