This paper tests the effects of exchange rate and inflation risk factors on asset pricing in the European Union (EU) stock markets. This investigation is motivated by the results of Vassalou (2000) [Journal of International Money and Finance, 19, 433-70] showing that both exchange rate and foreign inflation are generally priced in equity returns, and the opportunity to evaluate the causality between these sources of risk after the elimination of the EU currency risks because of the adoption of the single currency. Our results show that both exchange rate and inflation risks are significantly priced in the pre- and post-euro periods. Moreover, the size of exchange rate and inflation risk premiums are economically significant in the pre- and post-euro periods. Futhermore, the UK and excluding-UK inflation risk premiums explain in part our evidences about a large EUR/GBP exchange rate risk premia and the existence of an economically significant domestic ¿non-diversifiable risk after the Euro adoption. Hence overlooking inflation risk factors can produce an under/overestimation of the currency premiums and a miscalculation of the degree of integration of stock markets.