Two Dimensions of Financial Openness: Gross and Net Effects on Financial Development in the European Union

ABSTRACT We examine how financial openness (FO) affects financial development in EU countries, distinguishing its size and quality. Gross financial openness, measured by foreign assets and liabilities, reflects international integration and shows an inverted U‐shaped link with development: intermediate levels of openness enhances efficiency, but excessive exposure reduces it. Net financial openness, the gap between assets and liabilities, displays a U‐shaped effect, where stronger external balance supports development beyond thresholds. We suggest that enhancing FO quality, rather than indiscriminate expansion, is key to sustainable financial development and long‐term stability.