European Destiny and Macroeconomic Responsibility in the Financial Systems of Germany and the UK: A Balance-Sheet Approach

European economic integration and the advent of a common European currency raise fundamental questions about the operations of the financial systems that are supposed to support these changes. Prominent among these questions is how banks and financial institutions operating in different ways and with different histories and traditions will deal with increasingly common European business as financial systems merge into one. The conventional wisdom is that competition between financial firms will ensure that those with competitive advantages (for example, British merchant banks with greater capital market expertise) will survive, while those firms which have fewer competitive advantages (for example, perhaps Germany’s small co-operative banks) will fail. In other words, that some common marketplace for financial services will sort out the less efficient from the more efficient, and ensure that the former are driven out of business or are forced to become more competitive (see Chick 2000 for a perceptive discussion of these issues). Implicit in this view is the notion that systemic factors, that is the way in which a financial system supports the intermediary firms in it and is vulnerable to changes in aggregate financial flows, do not influence the business of particular financial firms.