Thought Piece

Does the capital markets union still have momentum?

Posted: 25 Jul 2023

Resource Type: Thought Piece

Deepening and integrating European capital markets has been an EU priority for a long time. The core economic challenges have changed little over the last couple of decades. 

Banking versus capital markets 

There are two main issues. The first is the dominance of banking finance. On the supply side, Europeans save a lot, but they tend to save in deposits rather than real assets such as equities or infrastructure and they tend not to have large, funded pensions. This means that, on the demand side, financing for corporates and particularly small and medium-sized enterprises (SMEs) or start-ups tends to come more from banks rather than from venture capital, private equity, or long-term investors like pension funds.

European corporates are roughly twice as dependent on bank financing as their US counterparts

There is of course nothing wrong with bank lending, but the system would be more stable with a mix of bank and capital market funding, as in countries like the US (or indeed some EU member states like Sweden and The Netherlands). The comparison between banking and capital market finance in the US and EU is striking, European corporates are roughly twice as dependent on bank financing as their US counterparts

Second, where Europe does have equity markets or even start-up specialist markets, they are national and lack the scale of US markets. The US have two main stock exchange groups. Europe has dozens of stock exchanges and hundreds of trading platforms. Liquidity is therefore very fragmented. Many commentators note that start-ups, therefore, tend to go to the US market for financing and ultimately for IPOs.  

The capital markets union project  

So there have been multiple attempts both to drive a more equity-based investment environment in Europe and a more integrated approach to market infrastructure. Most people will have forgotten the EU Risk Capital Action Plan of 1998, but it led to a wave of measures to harmonise wholesale market regulation. Meantime, most citizens continued to save in banks and local markets and to rely on the state for pension provision, and most firms relied on their local banks. There was some market consolidation and more competition between trading platforms, but many would say the only real change was the gradual emergence of pan-EU platforms in London! 

The Capital Markets Union project promoted by then President of the European Commission Juncker and UK Commissioner Hill was a renewed attempt to push the capital market agenda forward. But as the think tank New Financial has reported, EU capital markets have continued to shrink compared to other global markets. The Von Der Leyen Commission recognised that progress was slow and that “Brexit and the Covid crisis have injected a new sense of urgency into the CMU project” (New Financial), and launched a fresh capital markets union (CMU) initiative in 2020. 

This initiative is now drawing to a close. Some progress has certainly been made - with reforms to listing rules and the setting up of a new EU reporting repository (ESAP - European Single Access Point) for corporate data for example. But proposals to encourage EU-wide personal pensions and even proposals to collate and publish market data from all EU trading venues have stumbled. Reforms to harmonise national insolvency laws and withholding tax are likely to take a long time to agree and implement. The Commissioner, Mairead McGuinness, recently blamed member states for not doing more. 

Building EU capital markets from the bottom up  

We recently discussed progress, or the lack of it, on CMU in a recent panel event in Brussels. Our friends at New Financial led off with their excellent report calling for bottom-up reforms, particularly to develop private pensions. Europe needs to build up the C in CMU. Some countries do this well. Others not so much. But I think New Financial are absolutely right to focus on getting young people to save in long-term assets. Auto-enrolment in pensions is the key.  

Europe needs to build up the C in CMU. Some countries do this well. Others not so much

I had a chat with Katarzyna Szwarc, who is championing local capital markets in Poland, and she picked up on this bottom-up theme: "There are situations in which a more proportioned or polycentric view could help. Especially in those areas where there are big disproportions between Poland and countries with a longer capitalist tradition. Looking at the size of the market, the size of the companies, the amount of money they need to make meaningful investments locally, there are a lot of differences, and they should be reflected in the future CMU regulations." I have heard this call for a more multipolar CMU quite a bit following Brexit.  

But one of the main sticking points that emerged from our panel discussion was the question of balancing local market dynamics with harmonised and convergent EU standards. Many industry participants would like to see for example centralised supervision in ESMA of at least the bigger parts of EU market infrastructure. Jacqueline Mills from AFME pointed out that centralised supervision works well in many cases, and that ESMA has also done a good job in ironing out differences in supervision. Many national entities such as exchanges, supported by member states, view this move with suspicion. And as Tanya Panova from the Commission pointed out, the Commission needs the support of the Council and European Parliament to progress. 

The next phase of CMU 

So where do things stand now? Well, there does seem to be momentum for a third CMU push. The Euro Summit in March called for “stepping up collective efforts, involving policymakers and market participants across the Union, to take forward the Capital Markets Union”. But details remain scarce. This looks like a topic for the next Commission. And maybe there needs to be some external nudge before we see progress. As William Wright from New Financial put it in our recent interview: "The problem with CMU is that there hasn't been enough of a crisis to which CMU is the obvious answer, unlike the banking union that was the obvious answer and largely the ready-made answer for the Euro crisis in 2011." 

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.

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