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After years of under-investment, the EU is recognising the enormous new capital resources needed to achieve a decarbonised, high-tech society able to protect its security and economic interests. This realisation is creating new impetus for a seamless capital market in the bloc. But its leaders still fall short of the political ambition Europe needs.
The “capital markets union” agenda grew out of the eurozone debt crisis, which exposed a lack of financial risk-sharing between countries. Raising the euro’s attractiveness globally through deeper investment pools was a secondary goal.
But little progress has been made. Losing the region’s biggest financial centre through Brexit has not helped. The cost of Europe’s fragmented and shallow capital markets has only increased, however, as the need for capital has grown: to redesign energy and transport systems, to refit industry for a zero-carbon world, to boost defence manufacturing capacity, and to allow innovative start-ups to grow without crossing the Atlantic for funding.
Governments neither can nor should provide most of the trillions in additional investments needed, and the EU’s bank-heavy financial system cannot mobilise private, long-term risk capital at the required scale. But private market capital remains hemmed in by patchworks of national laws, regulatory and supervisory bodies, and trading venues. The result is perverse: unused investment opportunities, inadequate rewards for savers, and an economy at risk of falling behind in a more fiercely competitive world.
Politicians are, finally, grasping the link between Europe’s productivity challenges and its fragmented capital markets. In a step-up of political engagement with an issue so far mostly relegated to technocrats, the eurogroup of finance ministers has agreed a statement on advancing CMU for national leaders at a summit next week. It follows a similar statement from the European Central Bank. Imminent reports commissioned from Mario Draghi and Enrico Letta, on Europe’s competitiveness and its single market respectively, should also highlight the urgency of CMU.
There is no mystery about what is needed. Investment and insolvency rules must be unified or at least harmonised, so investing across borders is no harder than within a single country. Where multiple rules persist, companies should be allowed to opt into EU-wide regulation and supervision.
Rules must strive for simplicity for investors, including retail ones, and businesses alike. More powers must be shifted to EU-wide bodies such as Esma, the bloc’s financial markets authority. Governments must embrace cross-border consolidation of market venues, financial providers, and investment products.
The EU’s technocrats know this. Politicians remain conflicted by the vested interests of domestic constituencies. But the eurogroup’s tentative commitments point in the right direction, accepting “convergence” on rules and calling for national measures to boost capital market investments such as ending the bias against equity in their tax systems. They now need to go further and faster down this path.
The challenge is more political than technical. Responsibility for making capital markets union a success lies with national leaders. They should go further than merely endorsing the eurogroup statement next week. Calling for more speed and ambition, and rapid follow-up, would keep the pressure on finance ministers to take bolder steps.
Leaders must also take ownership of the project, which needs as much political commitment as creating the single market did in the 1980s. Only leaders can convincingly tell citizens that their security and prosperity depends on Europeans everywhere putting their savings to work for companies across all of Europe. The dithering must end.
