The reality of European Monetary Union has quickly asserted itself on European stock markets in the early days of 1999. The simplest evidence of this is the quotation of all share prices in euros across Europe. More importantly, investment flows across the various European markets seem to be rapidly adapting to the new monetary regime. As European investment managers invest on a pan-European basis the already apparent trend of concentrating on the larger companies has been reinforced.

This has become apparent in the Irish market where the small capitalisation stocks have been left far behind the share prices of the large companies, many of which have been hitting new highs.

In particular the financial sector has continued to power ahead amid speculation that one or both of the main Irish banking stocks could be takeover targets or merger candidates for some of the larger European banks. Such speculation regarding the Irish banks is not surprising given that the financial sector across Europe has been witnessing a high level of merger and acquisition activity in recent years.

An analysis of the Eurotop 300 index, which includes Europe's top 300 listed companies (including British companies), points to the likelihood of a long period of corporate restructuring within Europe.

No less than 61 of Europe's largest quoted companies are in the financial sectors of banking and insurance and account for about 30 per cent of total European market capitalisation. The banking sector is by far the largest sub-sector and includes 46 constituent stocks. The next biggest sub-sector is pharmaceuticals, which equates to only half of the banking sector by market capitalisation.

The table lists the six largest European banks and, for comparison, shows AIB and Bank of Ireland which rank 22nd and 32nd respectively by market capitalisation. It is noteworthy that the largest banks are all either Swiss or British listed institutions which of course are not part of the euro zone. Deutsche Bank of Germany ranks 10th while ABNAmro of the Netherlands is 11th.

Up to now merger and acquisition activity in the banking sector has tended to occur within national markets. For example, in the Netherlands the two largest domestic banks joined to form ABN-Amro, while in Britain, Lloyds took over the TSB.

Indeed in our own market we are witnessing the merger of Irish Life and Irish Permanent which is due to be completed by March.

Takeovers and mergers across national frontiers have been relatively rare given the political sensitivities of national governments. Monetary union will ultimately change these attitudes towards cross-border corporate activity.

However, this change will take time and it is most unlikely that there will be a rash of mergers and takeovers across national frontiers.

It is likely that for the foreseeable future much of the restructuring will occur among the smaller institutions. In Ireland this process is under way and probably has much further to go in both the banking and insurance sectors. A merger between AIB and Bank of Ireland would seem to be totally out of the question given domestic monopoly considerations.

In a European context both AIB and B of I are already quite large as well as being among the most profitable banks in Europe. Their high share prices reflect this and would make them expensive takeover candidates.

Ultimately, both banks will probably become involved in European corporate restructuring but they are just as likely to be the predator company rather than the takeover target.