(FORTUNE Magazine) – THE crowning jewel of Europe's economic integration will be a unified European capital market, where companies large and small can scoop up equity money anywhere in Europe, and investors from Dublin to Dusseldorf can buy shares from each other's countries cheaply and easily. The architects of this megamarket envision a pan-European system that would deliver a share of Fiat as easily as one of Unilever to anyone, anywhere. Brokers from one country in Europe would operate freely in every city with a so-called European Passport that would grant them all the privileges of a local firm. The plan is a natural consequence of the steps currently under way to unite Europe's economic systems. But organizational blueprints aren't the only thing driving the move to a common capital market. Customers are demanding it. Cash- hungry companies throughout the EC are already looking beyond their national borders for markets that can provide low-cost equity financing. With many European banks emphasizing international growth over domestic lending, a lot of corporations that traditionally relied on banks for capital are now looking to the equity market for money. A further gush of equity is expected to come from thousands of private European companies started right after World War II. As the family heads of these small and medium-size firms step down without heirs interested in taking over, boards may seize the opportunity to take the companies public. Demand for shares is also expected to surge in the years just ahead. Faced % with an anticipated decline in interest rates, European pension funds will begin to look more at investing in stocks. And there will be more pension money to invest. In the U.S., some 70% of private sector savings is in the form of institutional pension funds. In Germany and France, it is less than 5%. But this number is expected to go up as an expanding legion of retirees forces companies to build up pension reserves. Says David Roche, an international strategist at Morgan Stanley in London: ''Pension funds are about to become Europe's new growth industry.'' As pension assets swell, the demand for equities should surge. The capital market envisioned for a united Europe would satisfy all these demands. It aims to have the EC's biggest companies cross-listed on all the major stock exchanges but to have companies report their financial statements only in their home countries. It would eventually include Europe's non-EC members, such as Switzerland and Austria. By making cross-border securities trading easier, Europe's planners hope to stimulate growth in all the equity markets.

Europe's stock markets can use the boost (see the market capitalization numbers below). With the exception of London, which has more listed stocks than New York's Big Board, most European markets are underdeveloped relative to the size of their economies. They currently have some of the lowest equity- to-GDP ratios in the world, and the few stocks listed totally dominate their exchanges. The market value of the top ten domestic stocks on the New York and Tokyo exchanges amounts to only 15% to 20% of their respective markets' total capitalization. But in Germany, Belgium, Spain, and Italy, the top ten stocks account for about 50% of the market, and Amsterdam's corresponding figure is 80%. So far the small movements toward market integration have been as harmonious as merging a punk rock band with a classical string quartet. The ambitious designs are being slowed by national rivalries, out-of-date market regulations, language barriers, and local corruption. European stock markets can overcome such obstacles. Indeed, Europe's bond market has successfully transcended national boundaries. Integrating the equity markets will not be so easy. The bond market is wholesale -- institutional investors move quickly and quietly, practically without government regulation. The only goals are liquidity and transactions at the lowest cost. But equity markets serve small investors too. That means there must be laws to protect the little guys, as well as regulations to require institutions to reveal more about their dealings -- something regulators call ''market transparency.'' That's easier said than done. Though some markets, like Paris's, are highly transparent, revealing volumes and prices within seconds of a trade, others, like Milan's, remain mired in outmoded practices that keep information from reaching investors quickly. Nearly three-quarters of Italy's stock trades are made off-market by banks and brokers, which privately match customers' orders. Price information on these trades may not be available until the next day. Italian authorities say that should change in 1992. So, too, if small investors are to have confidence in markets, governments will have to tighten regulation and enforcement. In Germany the legislature is only now considering a formal law to ban insider trading. Other countries have their own problems: The Milan stock exchange has dealt with two cases of large-scale fraud in recent months. The European Commission, which is overseeing plans for Europe's economic union, has drawn up some guidelines for the exchanges but has little power to enforce them. EC officials are counting on market forces to prompt wayward exchanges to clamp down. They believe that once the unified market is established, trading will probably drift away from exchanges that do not adhere to EC standards. Despite these difficulties, Europe's financial market chiefs are making some headway. The next big step toward market unification will take place when the EC's member exchanges approve Eurolist, a proposed cross-listing of over 250 of Europe's blue-chip companies on all exchanges in the EC. Though some EC countries are urging delays in the Eurolist launch, optimists hope it can get off the ground in the next year or two. Some 50 well-known European companies, like Bayer and Royal Dutch/Shell, are already listed on several exchanges within the EC. But it takes myriad listing fees and mounds of paperwork to satisfy each nation's financial reporting requirements. One European company that trades on six different exchanges reports that its annual listing fees for all these exchanges total $50,000 to $60,000, and the cost of meeting the differing disclosure requirements amounts to nearly $1 million a year. Eurolist would reduce listing charges to a single fee and allow companies to satisfy all reporting requirements by simply meeting their home country's reporting rules. It would also be a boon for European investors, since it would allow them to buy stocks outside their home market without paying extra commissions. THOUGH SUCH STEPS are designed to foster cooperation among EC exchanges, they have lately been stirring competition. With Eurolist, for example, trading of a company's shares is expected to remain largely in its home market -- German investors would buy Siemens stock on one of the country's eight exchanges. But other exchanges would compete for an increasing share of the international trading volume in these stocks, most of which now goes through London. Britain's market planners expect to retain a substantial part of its European business because of the London Stock Exchange's computerized trading system for international stocks, called SEAQ International. It can swiftly handle trades in more than 600 international stocks. But the competition is heating up. Germany, which boasts the highest domestic trading volume in Europe, has developed its own trading technology, known as IBIS, which allows for immediate transmission of trading data to the exchange's clearing system. France is tooling up its exchange as well with a new computerized clearing and settlement system that began operation this year. Most of Europe's other exchanges are on the computer bandwagon as well. The heavy investments in technology are making a big dent in the exchanges' budgets. Says one official in Paris: ''We have a very difficult situation: Trade volumes are low, fixed costs of stockbrokers are high, and we have to invest in new systems and rack our brains on what strategy we need.'' The technological advances will bring gains. Even if these systems aren't as compatible with those in other countries as everyone would like, they will greatly increase the ability of the various markets to handle big trades and to settle those trades in an acceptable time. That will enhance the attractiveness of Europe's smaller markets, like Dublin and Lisbon, where the biggest obstacle to investment has been a lack of liquidity. Spain was a backward market in the mid-Eighties, but heavy investment in technology has made it a more hospitable place for international investors. It is now viewed as one of the most promising places to invest in Europe (see Personal Investing). Europe's exchanges are still searching for the middle ground between competition and cooperation. Balancing these two ideas is critical to the success of Europe's financial services industry. Whether Eurolist succeeds, says Malcolm Duncan, an international stock market consultant, ''depends on whether European or national priorities have the upper hand.'' Each exchange is rightfully proud of its own developments and reluctant to submit to the rules and technology of other countries. Ultimately, alliances will have to be forged, and certain technologies will win out. Though some markets will gain more than others, the longer-term benefits of integration will flow to all.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCES: INDIVIDUAL EXCHANGES AND THE FEDERATION OF STOCK EXCHANGES IN THE EC CAPTION: HOW EUROPE'S MARKETS STACK UP The combined capital ization of all EC markets is just over $2 trillion, putting it in a league with New York's and Tokyo's. The listing of funds set up to raise money for Germany's reunification helped boost trading volume last year.