The foundations for the European Union (EU) we know today were laid in 1957. Since then, it has grown to be one of the strongest economic areas in the world. But the integration of Europe’s financial markets was only addressed at a rather late stage: intra-European capital controls were abolished in the late eighties, and the euro single currency was introduced in 1999. It took until 2015 for the European Commission to decide on an action plan for a European Capital Markets Union – a full integration of Europe’s fragmented capital markets, with the goal of improving financing and investment opportunities, and thus boosting innovation and growth. Some laudable initiatives were launched. But with rising euroskepticism and the Brexit decision, momentum for the project got lost for a while. It has recently returned and should be used. It is time to push again for a European Capital Markets Union.
How does a Capital Markets Union (CMU) benefit the EU? Let me count the ways. A CMU will improve companies’ access to capital, by making it easier, for example, to issue a bond, to go public or to get a syndicated loan. European companies still predominantly rely on bank financing and don’t use the broad range of financing options the capital markets offer as intensively as, for example, their peers in the US. Especially small and mid-sized companies tend to avoid the capital markets, one reason being onerous and complicated requirements for the information they have to publish, such as the prospectus for a bond issue.
One aspect of the CMU would be to relax and unify these requirements to make it less complicated for SMEs to issue bonds, thus reducing their reliance on bank loans. If firms of all sizes have easier access to a more diverse menu of financing options, this will spur innovation and economic growth across the EU. For example, a strong presence of venture-capital funding in an economy tends to breed start-ups, thereby creating additional employment. More diverse sources of financing also help companies of all sizes to improve their risk management and hedge against market volatility.
Emmanuel Macron’s victory in the French election has led to a resurgence of trust in the European project. The German election has also shown that most voters believe in the European Union.
Investors will benefit from a CMU as well. Not only institutional investors, such as fund managers or insurers, but also retail investors will have a broader horizon of opportunities. Just look at insurance companies and pension funds: Long-term pools of capital represent just two thirds of GDP in the 27 EU states that will remain once Britain leaves, compared with nearly 200 percent in the UK, according to the think tank New Financial. The CMU is a boon for investors by making the capital market in the EU-27 larger and more liquid.
Of course, the CMU must be implemented in the right way: First, the European Commission should harmonize the various supervisory approaches in the member states, leading to one single rulebook across the EU, but also striving for consistency with global regimes. Regulators such as the European Securities & Markets Authority (ESMA) and the European Banking Authority (EBA) will play a crucial role here, and it must be ensured they can fulfill their task or are appropriately strengthened if needed.
Second, legislation must assure that capital markets stay liquid, with enough buyers and sellers at any time. Interest-rate dynamics, changes in regulation, and market reforms can dry up market liquidity. Some market participants report that they are already experiencing reduced liquidity. This is why legislators must appreciate the special role of market makers, who put their own capital at risk to enable clients to trade.
Last, Europe’s markets need to remain open to global capital. Brexit has increased the sensitivities around Europe’s approach to third countries. But for the EU to tap the full potential of unified capital markets, American or Asian sources of capital need to have access to the EU as well, and on comparable terms to EU firms and investors. It is therefore important that European policymakers continue to look outward.
Emmanuel Macron’s victory in the French election has led to a resurgence of trust in the European project. The German election has also shown that most voters believe in the European Union. Obstacles remain, but the new enthusiasm should now be used to invigorate European capital markets. Judging from the upbeat tone of its mid-term review of the initiative, the European Commission appears eager to drive the CMU forward. Uniting the EU’s fragmented markets for shares, bonds and other securities is good for innovation, growth and competitiveness, good for companies, for investors and for consumers. Now is the time to complete the project.
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