International portfolio diversification: did industry and country effects change after the formation of the Euro?

For investors, it is highly relevant to know whether it is more important to diversify over countries or over industries. In this paper, 10 Eurozone countries, which adopted the Euro in 1999, have been studied. Before the formation of the Euro in 1999, country effects were dominant over industry effects within the Eurozone. Since 1999 a decrease in country effects can be observed. Not only the Eurozone countries, but also the European countries which did not adopt the Euro, experienced a structural decline in country effects. This implies an increased financial integration within the EMU. Comparing the country effects of Eurozone versus non-Eurozone countries shows that adoption of the Euro does not contribute to more integration. The study also explicitly looks at the effect of the financial crisis, starting in 2007. Contrary to my expectations, the country effects have only increased temporarily within the Eurozone since the financial crisis and rapidly retuned to its pre-crisis level. Moreover, the country effects did not exceed the industry effects after the financial crisis.