The financial sector is playing an increasingly significant role in European economies: on average, its share of total GDP rose from 2.3 per cent in 1951 to 8.7 per cent in 2007. However, the subprime crisis has brought the role and size of the Financial sector to the forefront of the debate: do its recent developments justify the position it occupies today? Should its growth be regulated?
This report proposes a measure of the unit cost of finance – i.e. the production of financial services – over the long term in a selection of European countries. This measure aims to assess any efficiency gains within the financial sector. The results show that finance in Europe has become increasingly ‘expensive’ since the 1970s, a period of deregulation whose very aim was to make its services more productive. The rise in intermediation costs between 1970 and 1990 can, however, be explained by macroeconomic and monetary conditions. Conversely, the rise in the unit cost of financial services after 1990 in many European countries coincides with the accelerated development of modern finance, which assigns a central role to market activities.
