EU capital markets have come a long way in the past few decades. However, they remain considerably less integrated than markets for manufactured goods or labour. And this means they fall short of what the EU needs.
Opportunity costs
This situation brings with it enormous opportunity costs: lower potential economic growth, less resilience to economic shocks and less choice in financial products for EU citizens. And more opportunity costs are emerging, for instance there is less capacity for financing the transition to a climate-neutral and digital future. There is also less capacity for innovation, due to a lack of financing opportunities for higher-risk projects, which need direct funding sources provided by capital markets. The coming decades will most likely see fierce competition between economies for innovative, high-tech industries. If the EU cannot compete in the innovation race, it will fall behind. So, developing and integrating EU capital markets is of paramount importance for the future of Europe. All this means that the Capital Markets Union is not just a ‘nice-to-have’ but a ‘must-have’ for Europe – it is crucial that we remain ambitious on this pressing matter.
With the stakes so high, why is progress so slow? Often the answer involves political will. Market integration, for instance, requires a number of specific and technically complex actions, which makes it hard to build an appealing narrative. Vested interests are another challenge, because the benefits of market integration are typically large, yet diffuse, while the costs are more concentrated and are therefore readily brought to the attention of national governments. Also, competition among Member States for the location of financial service providers further complicates things.
Renewed dynamism
It is encouraging to see the recent dynamism of the political debate on Capital Markets Union and the high-level political support being expressed. And the Commission is starting its own internal reflections on possible future action. While the specific priorities will be defined by the new Commission later this year, I believe that they should reflect the need for our capital markets to increase in size and liquidity in order to become more efficient and competitive. This means we need to be careful about calls for a greater national focus in the approach to EU capital markets – the so-called ‘bottom-up’ approach. While this approach has its merits, national specificities are very often a source of fragmentation rather than an opportunity. Capital Markets Union has to be about one large and developed capital market for the EU as a whole and not a collection of separate national markets, however developed they become. Therefore, in building a single EU market, we must focus on the fundamental features that characterise any single market – for instance, a common insolvency law, common tax procedures, common supervision, common accounting standards and common corporate laws.
If we keep these considerations front and centre and make use of the current political momentum in favour of Capital Markets Union, we will be able to make changes that make a real difference, benefiting markets and the economy as a whole, and most importantly, all EU citizens.
