Come Together

Brexit could be catalyst for more integrated European capital markets

U.K. Retail Sales Increase
Soon they'll be gone. Source: Bloomberg

A finalized action plan to put the building blocks for a Capital Markets Union in place is due in 2019 – just one year away. The EU has always needed a CMU, and the reasons why haven’t changed, but in light of Brexit, they have become more important.

The overarching aim, of creating deep and integrated capital markets that drive economic growth and job creation across Europe, is a pivotal objective to work towards. But keeping the project moving towards its stated aims means finally transitioning into the next phase. And with Juncker’s time as Commission president swiftly coming to an end in 2019, thinking needs to keep up with the current political momentum.

Simply put, Brexit should be seen as a catalyst for further developing a CMU rather than undermining current progress, especially as 46 percent of the EU’s equity comes from the UK.

That isn’t to say real progress hasn’t been made. Since the 33-item action plan was announced, real progress was made. Among the early actions were a comprehensive package on securitization to free up capacity on banks’ balance sheets for more lending to the real economy and a new regime for prospectuses to allow easier access to public markets, particularly for SMEs.

Whatever the final Brexit deal, it is important that third-country cooperation remains a useful tool for a successful CMU.

With two-thirds of the actions adopted or submitted, the Commission recently announced new plans for funding sustainable investment and harnessing the potential of FinTech, among other proposals.

The latest initiatives cover some of the most innovative areas for the future of finance and provide opportunities for innovation and investment in enterprises that can tackle the global challenges of the future. FinTech, in particular, has the potential to revolutionize the way both retail and institutional investors invest capital in Europe’s businesses through developments in areas such as crowdfunding, for example.

So, the project is still very much on track, but we must also be realistic. Maximizing efficiencies in the EU’s internal capital markets will only go so far in increasing their capacity. To be truly transformative, the CMU must unlock investments both from within the EU and the rest of the world to drive economic growth.

Encouragingly, Europe’s economies grew at their fastest rate in a decade in 2017 and its employment levels are at their highest. In order to continue fueling that growth, we need to create strong capital markets to complement Europe’s bank finance.

To do this, the CMU must provide incentives for investing in equity sources of capital, but also aim to attract new sources of financial capital. In this respect, it is important that both EU and non-EU sources of financial capital can be deployed within the EU, to aid economic and employment growth. In other words, increasing cross-border risk-sharing, creating more liquid markets and encouraging more diversified sources of funding to deepen financial integration must remain core objectives of the CMU as stated in the initial 2015 plan.

Whatever the final Brexit deal, it is important that third-country cooperation remains a useful tool for a successful CMU.

It would be a tragedy if Brexit upheaval caused the CMU to be left incomplete.

In the next phase of the project, open and globally competitive markets with respect to direct inward investment in loans, debt and equity, as well as to inward investment and cross-border trading activity channelled through banks, insurers, and investment and pension funds, should be given more prominence in legislative initiatives.  For example, a regime for third-country securitizations would be desirable because the UK represents a good portion of the current EU securitization market and it is in the interests of the EU to have a market with scale and liquidity.

The development and completion of a CMU will still take many years. Launching new initiatives is just the start of the process. The project needs political ambition and commitment to tackle the strategic issues and barriers that restrict the flow of capital both from within and outside Europe, such as reform of Europe’s insolvency laws, tax disincentives and the unintended consequences of the impact of new sets of regulation on growth.

In the coming years CMU action should have a razor-sharp focus on high-impact initiatives that will support sustainable economic growth. It would be a tragedy if Brexit upheaval caused the CMU to be left incomplete.

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