The incoming president of the European Commission, Jean-Claude Juncker, has declared the creation of a “European Capital Market Union” a central component of his program. As a complement to the European banking union, which was initiated in 2012 as a response to the euro zone crisis, it can be a further step toward a real, functioning single financial market in the European Union.
The capital market union is sensibly aimed at achieving a better integration of national capital markets, lending more importance to the capital market as a whole. But where exactly are the shortcomings of the existing single market, which already includes provisions for capital transactions?
For example, securities trading in Europe has largely been done on a national basis until now. This is essentially because of the different rules for capital issues, the rights of investors, as well as in insolvency and taxation law. Moreover, the market suffers from decreasing liquidity, not least because of a tightening of banks’ own funding requirements.
Another deficiency is a pronounced weakness in venture capital. Any positive developments on the securitization market were also mostly nullified by the financial crisis – and this at a time when banks’ balance sheets are shrinking and relief is urgently required from alternative, external financiers. It would be much easier to “sell” a joint European capital market, especially to non-European investors.
What can the successful capital market union achieve for Europe? Why do we need a stronger capital market?
It would be much easier to “sell” a joint European capital market, especially to non-European investors.
First, a more balanced financing mix is useful for companies: The additional option reduces the dependence on bank loans and creates additional flexibility. Second, broader and deeper capital markets can give savers more attractive returns: In times of low interest rates, progress made in encouraging investment in shares is of particular importance.
Third, making provision for old age in Europe should be based on a broader platform, with capital investments becoming an important component of pension systems. Fourth, private investors will have to play an essential role in supporting the highly indebted public sector’s investment in infrastructure. Fifth, local and regional authorities will have an increasing need for the capital market in future.
Despite all the advantages, an integrated financial market also has risks. As it became apparent in the financial and debt crisis, we need better institutions, mechanisms, regulation and supervision to be able to limit Europe-wide contagion from negative developments in individual markets.
The examples of investments in Spanish and Irish property or Greek government bonds proved that advantages such as market size, liquidity, balanced risk, diversity and better allocation of capital can also be undermined. But that can be changed: The creation of the banking union, for example, with joint supervision of the biggest banks in the euro zone, is a big step in the right direction.
As Europe’s biggest economy, Germany will have a particular role to play in the formation of the capital market union.
As Europe’s biggest economy, Germany will have a particular role to play in the formation of the capital market union. In Germany however, the stock market, the securitization market and the financing of new entrepreneurs and start-ups are generally not well developed. Even the market for corporate bonds has only taken off in recent years.
Therefore the first move to improve structural conditions for strong capital markets should be made in our own country. It would certainly be a great help to refrain from introducing a counter-productive financial transaction tax; it would be sensible to increase investor protections, and in particular the rights of minority shareholders, to improve the exit options of venture capital providers on the stock market.
So there is a real need for a bigger, more liquid and integrated financial market in Europe. It would also be useful for companies, private persons and the public sector in Germany. The realization of a strong, functioning capital market union is therefore in everyone’s interest.
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