08 Mar 2018

Brexit could be a catalyst for more integrated European capital markets

The completion of the action plan to put in place the building blocks of a Capital Markets Union (CMU) is due in 2019 - just one year away. While the reasons for needing a CMU in the EU remain unchanged, they have become more important than ever in light of the UK’s decision to leave the EU.

The overarching aim, of creating deep and integrated capital markets that drive economic growth and job creation across Europe, continues to be a key goal to work towards. 

However, in order for the project to meet its stated aims, it has to move to the next phase and with the clock ticking down to the end of the Juncker Commission in 2019, this thinking needs to happen now in order to keep up the all-important political momentum.

In this respect, the withdrawal of the United Kingdom in which 46% of the EU’s equity is currently raised, should be seen as a catalyst for its further development, rather than undermining CMU progress made to date. 

Since the ambitious 33-item action plan was announced, it is clear that some real progress has been made. Among the early actions were a comprehensive package on securitisation 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.

With two third of the actions adopted or submitted, the Commission has today 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; providing opportunities for innovation and investment in enterprises that can tackle the global challenges of the future. FinTech, in particular, has the potential to revolutionise 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. Maximising 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 keep fuelling 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 this respect, increasing cross-border risk sharing, creating more liquid markets and encouraging more diversified sources of funding to deepen financial integration have been core objectives of the CMU since the initial plan in 2015.  

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

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 securitisations would be desirable because the UK represents a good portion of the current EU securitisation 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.  

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

 

This opinion was first published in Milano Finanza, Expansion and Handelsblatt on 8 March 2018