As the EU gears up for another 5-year political cycle, there is an increasing sense of urgency around the need to deliver the Capital Markets Union (or CMU) project.
Some have recently called for the project to be rebranded. For example, the finance ministries of Germany, France and the Netherlands (known as the Next CMU High-Level Group) have recently called for the project to be renamed the “Savings and Sustainable Investment Union” to make the project more accessible for citizens and companies. But it will take more than a new name to get this epic project over the line. The new Commission will need to prioritise and focus on the “big ticket” CMU initiatives. And there is a need to focus on fewer, but more impactful, priorities and to set clear timelines.
As the newly appointed Commission prepares to relaunch the CMU project, there are a number of key areas to focus on.
First, Europe needs to make its markets more efficient. A fundamental challenge is to ensure that all the elements of the securities market structure are interoperable, can communicate with each other, and can function in a cost-efficient manner, so that EU savers and investors can achieve the benefits of a single market. Here a review of the sweeping EU markets regulation, MiFID 2/R is required, as well as addressing the long-standing barriers to an integrated post trade system.
Second, for the CMU to be successful, Europe needs to expand the size, capacity and liquidity of its capital markets. Owing to market uncertainty, there is a scarcity of companies in the EU deciding to take the plunge and undertake an Initial Public Offering. To encourage companies, particularly SMEs, to go public, the EU needs to strengthen its public markets and ensure there are no unnecessary regulatory burdens or costs that might act as a deterrent.
Third, the EU needs to catch up with other nations on facilitating FinTech innovation. FinTech provides opportunities to lower costs and provide more efficient services, while offering greater access to finance to a wider range of consumers. However, EU27 FinTech companies have benefited from a mere $7.2bn in investment since 2009, compared to a huge $120bn in the US, $23.8bn in China and $20.3bn in the UK. Going forward, the CMU needs to focus on this important sector in order to make the single market fit for the digital age. For this to happen, regulation and supervision need to be tailored to the fast-evolving digital challenges to ensure that innovation is not quashed. Artificial Intelligence (AI) and bigdata also present opportunities for disruption and revolutionising financial services, which should be explored in full, while closely monitoring the potential risks.
Fourth, Europe must continue to strengthen its global lead in sustainable finance. As a percentage of global issuance, the EU28 remains ahead of the US and China by a significant margin due to the rate of growth of sustainable bonds issuance. For example, the EU issued 43% of global sustainable bonds in 2018 compared to 18% by China and just 16% by the US. Now the challenge for the EU is to further build on its leadership by providing clarity on assets that can be considered sustainable. Having clear labels and standards for sustainable products would allow investors to make informed choices which is key for the transition towards a climate-neutral economy.
Finally, Europe needs more capital markets and less lending. According to AFME’s annual report which tracks the EU’s progress against the CMU’s objectives, European companies received 88% of their new funding in 2018 from bank loans and only 12% of funding came from markets-based finance (such as bonds and equity). In fact, Europe’s reliance on bank lending has increased since 2013-2017. Therefore, Europe needs to broaden its funding options to increase the share which is delivered by capital markets, allowing borrowers to access the full range of funding opportunities appropriate to their needs and the maturity of their businesses. In this respect, more investment from retail investors could help to put savings to more productive use in the capital markets. Deep pools of capital help to channel investment into the real economy, supporting company growth and job creation.
Another way to unlock Europe’s growth potential is through the creation of a powerful financing union consisting of integrated banking and capital markets. The Banking Union and Capital Markets Union projects are intrinsically linked and mutually reinforcing. A fully functional and integrated Banking Union can help achieve a more integrated capital market in the EU – supporting economic growth and helping to diversify risk.
The next five-year political cycle needs to be bolder and more decisive on CMU. Simply rebranding the project won’t take the project to the next level. There are a vast range of issues to be tackled which will require strong political leadership and a renewed focus on the top priority issues.
This opinion was originally published in Revue Banque on 22 November 2019