It’s been nearly a decade since the European Commission set out its ambitious plans for a Capital Markets Union (CMU), diversifying sources of funding in Europe’s economy. Progress so far has been slow and Brussels now has conceded it needs help to persuade member states and its citizens of its merits before it can make another push
Europe punches well below its weight in global capital markets activity, with companies relying more on bank loans for financing than is common in the US, with many of its citizens choosing to leave significant amounts of their assets sitting in bank deposits and with start-up companies often having to leave the union in order to access market financing. The European Commission (EC) has diagnosed a lack of integration and a lower level of development of certain national capital markets.
To improve this situation, the EC has made it a policy priority to establish a Capital Markets Union, as part of its road map to a European banking union, an institution so sorely missed in some quarters during the 2008 financial crisis. The economic policy initiative to create a single market for capital on the whole territory of the EU was launched in 2014 by former Luxembourg prime minister Jean-Claude Juncker in his role as EC president. Establishing the CMU is expected to attract some 2,000 billion dollars more on the European capital markets, in the long-term, according to its proponents.
Much better place
Speaking at an afternoon-long 1 June Brussels conference discussing the CMU (the “high level conference on capital market union - investing for a stronger, prosperous and sustainable European Union”), European Commissioner Mairead McGuinness explained how if “all our work comes to fruition, Europe will be in a much better place than it is today around capital markets.”
Commissioner Valdis Dombrowskis pointed out that integrating national capital markets into a single market for capital “helps the local economy by creating more sources of financing and capital, particularly for smaller businesses.” He explained that the CMU would help small-and medium-sized enterprises get help at each stage of their development. “All too often, start-ups move abroad to scale up because they find it difficult to get market-based finance in Europe.”
McGuinness linked the development of the CMU to improving Europe’s ability to deal with some of the biggest challenges facing the EU, including the war in Ukraine and the coming catastrophe of climate change.
Unlocking the psyche
She referenced the build-up of cash deposits in banks during Covid. “Why weren’t we thinking of investing our money? What is it in the European psyche that can be unlocked? And how do we unlock that in a way to allow people to take control of their financial interests.”
In fact, a lot more money is just sitting in bank accounts in the EU than is the case in the US or even the UK and certain northern countries. A 2020 EFAMA publication entitled “Household Participation in Capital Markets” contained statistics showing that Luxembourg households keep 56% of their assets as bank deposits. In the Netherlands, Denmark, Sweden and the UK, households hold less than 30% of their financial wealth in deposits.
Commissioner Paolo Gentiloni explained that US firms get about two thirds of their financing from tradeable instruments, whereas in the EU it’s only a third, with companies relying much more on bank financing. He said that limited market finance is “a particular disadvantage for young and innovative firms and it has a direct impact on the opportunities of our countries.” He pointed out that in the US, “there is almost seven times more venture capital funding than in the union.”
‘We need your support’
Acknowledging that the CMU’s development has been slow, McGuinness stated that “CMU does not happen overnight. It happens over time, but it won’t happen without taking concrete steps, and making this relevant to business and consumers and citizens alike.”
Departing from his prepared remarks at the end of the conference, John Berrigan, a director-general in the EC’s Directorate General for Financial Stability, Financial Services and Capital Markets Union , known as DG Fisma, described the complexity of the task. “It takes a lot of complex legislative reforms,” he said. “But it also takes a lot of courage to subordinate established national interests, to the systemically important, but typically more diffuse economic benefits of market integration.”
Berrigan reiterated the message that the CMU could not be a “Made in Brussels” project. He emphasised the need for support from national legislators, but also of private market participants. “Not just to have it, but we need you to make others know that we have it. So we need your support to be loud and clear, especially at the national level.”
Investor trust
The issue of investor education and clarity in communication was raised by more than one speaker, including Verena Ross, an economist and executive director of the European Securities & Markets Authority, or Esma. “It is about creating capital markets that actually serve the European citizens and building the trust of investors,” she said.
“We need, on the one hand, to make sure that there is proper education, information flow, that disclosure, which is provided actually is understandable, comprehensible, comparable,” she said. “We also need to make sure that we actually build trust with the financial market players, that when people go and get advice that they actually know that it is unbiased, that they get the best deal that they can.”