Reasons to be cheerful on capital markets union

This summary is based on discussions over the past few months (most recently at the Eurofi seminar in Ghent) with policymakers, officials, and market participants from across Europe, and the raft of papers and proposals on capital markets over the past few weeks from the ECB, the Eurogroup and individual member states. It outlines four reasons to be optimistic about capital markets union - and two reasons why we should not get too carried away.

1) A renewed political commitment

Over the past decade capital markets have moved up the political agenda across the EU, but capital markets union has largely been seen as a ‘nice to have’ rather than ‘must have’. There has been a step change in political commitment over the past few years that has crystallised in recent months in two ways. First, the combination of Brexit, Covid, and the invasion of Ukraine have heightened awareness that the EU economy needs all the help it can get and that capital markets are an essential part of the solution in driving growth, investment, and competitiveness. And second, there has been a clear shift in the narrative around CMU away from it it being a technical project focused on regulatory harmonisation to one focused on addressing fundamental economic and social challenges facing the EU economy and its citizens.

Bigger and better capital markets are not an end in themselves - they exist to drive investment in growth, jobs and prosperity. Framing CMU in more concrete terms has been a big part of our work over the past year: how can capital markets help finance the transition to net zero; finance innovation and the digital economy at scale; ensure a diverse range of funding for companies across the EU at every stage of their development; and help address the demographic timebomb?

The political shift has been reflected in the work on CMU conducted by the Eurogroup of finance ministers over the past year that was published this week (the first time the Eurogroup has focused on CMU), the review of the effectiveness of the single market led by former Italian Prime Minister Enrico Letta (due imminently), and the review of EU competitiveness being led by former president of the ECB Mario Draghi (expected in June). Of course, it is far easier to make public statements of political commitment to CMU than it is to deliver the reforms required to achieve it, but this shift in tone, commitment, and focus is a good place to start as CMU enters its second decade.

2) The limits of top down

There is a growing recognition across the EU of the limits of what can be achieved from the ‘top down’. Building bigger, better, and more integrated capital markets in Europe needs a combination of ‘top-down’ measures at an EU level to encourage harmonisation and integration, and ‘bottom-up’ measures at a national level to build capacity. As with many EU projects, CMU has often focused too much on the ‘U in CMU’ rather than the C or the M. This approach assumes that capital markets in Europe can harmonise their way to greatness and that if only the EU had a genuine single capital market, everything would be fine.

Of course, more integrated markets with less fragmented supervision and fewer national barriers would reduce costs and frictions, and help boost activity, competition, and economies of scale. And yes, member states should take a deep breath and push ahead with structural reforms to reduce those barriers and better integrate markets. But you cannot magic bigger capital markets out of thin air from the top down alone. There is nothing intrinsic about being in the EU that means a country cannot have deep and effective capital markets - as countries like Sweden, the Netherlands, and Denmark have shown. And if every member state had capital markets like Sweden - and there is nothing stopping them from doing so apart from themselves - the debate on CMU would be very different.

The first order problem is that EU capital markets are not developed enough. The second order problem - that contributes to the first but is not the cause of it - is that EU capital markets are too fragmented. Trying to solve the first problem by focusing too much on the second problem is not going to deliver.

PEPPs are a perfect example of the limits of a top-down approach. The Pan-European Personal Pension Product was part of the original CMU package in 2015 and officially launched in 2022 after nearly seven years of debate. Officially, they would help deliver an increase of €700bn in long-term capital. But as of today, there is just one commercial provider of PEPPs (a roboadviser in Slovakia). For reference, over the past decade pensions assets in the Netherlands and Sweden alone have grown in real terms by €700bn.

3) Embracing bottom-up

In the past year there has been a growing recognition by member states that they need to take more responsibility for developing their own capital markets from the bottom up. Many of the big barriers to deeper capital markets are national in scope and beyond the remit of EU authorities (such as pensions, tax, incentives, and investment culture) and only member states can change them. If Italy, Spain, or Germany - or any other member state - want bigger capital markets, they have to recognise the need for them, want to develop them, and start doing something about it themselves. Waiting for a single supervisor, a single insolvency framework, or Mifid 4 is not going to move the dial.

This month Germany has pushed ahead with its Generationkapital plan to create a fund that it hopes will grow to €200bn in the coming decade to help finance state pensions, and the Eurogroup report called for countries to develop and share national capital markets reform plans (similar to the capital markets development work conducted by the Commission and the OECD with markets including Italy and Poland). The Franco-German roadmap for CMU from last year called for a better balance between top down and bottom up, with a role for EU authorities in co-ordinating national initiatives across the EU (echoed by the Dutch roadmap last month) and we have seen more evidence of fact finding missions and sharing of best practice between member states.

Bottom-up capital markets initiatives should not be dismissed as a free for all in conflict with EU harmonisation. It is not about member states making up their own rules outside of the EU framework or seeking special treatment from EU authorities. Bottom-up initiatives would be most effective if they are co-ordinated at an EU level and broadly pointing in the same direction, and should work alongside top-down measures.

4) Accepting trade-offs

There is also growing evidence from member states that they are more prepared to accept some of the inevitable trade-offs that CMU involves. The traditional problem is that the economic and social benefits of CMU are long-term, abstract, and diffuse but the costs are short-term, concrete, and large for many local market participants in member states across the EU. There is a strong sub-text running through the Eurogroup report - as agreed by all 27 EU finance ministers - that many of the national barriers to bigger and better capital markets in Europe (such as fragmented market infrastructure) are only there because member states want them to be there (and by inference, can only be removed by member states themselves). This reflects our thinking that for the EU to have the capital markets that it needs, member states will not be able to have the capital markets that they want.

Recent calls by Euronext for single supervision across the six stock markets that it owns and operates in the EU, and the recent French proposal for a coalition of willing markets to push ahead with single supervision and effectively merge their supervisors demonstrate that the perfect should not be the enemy of the perfectly good.

A false dawn? 

Despite our optimism on the outlook for CMU, there are at least two reasons to not get too carried away:

• A broken record? We have been here before. Over the past 10 years there have been episodic outbreaks of political commitment to CMU, with opinion articles and speeches calling for renewed urgency and concrete action, often by finance ministers who are quite happy to draw the line once CMU begins to interfere with their national markets. (A cynic might even think that sometimes the best way to kill off a project that might involve painful political trade-offs is to enthusiastically support it…).

This is compounded by the philosophical instinct of many EU authorities that there is no problem in Europe that cannot be solved with more harmonisation or a single EU product. There is sometimes a sense that ‘if we only push a bit harder on harmonisation, this time we will get there’ even though the evidence over the past decade suggests that this approach will not deliver on its own.

• Diving into the detail: it is great to see the high-level focus on CMU and the commitment to change as shown by the reports on the functioning of the single market (Letta report), EU competitiveness (Draghi report), and on CMU itself (Eurogroup report). But the danger is that once these reports are published and we have stopped admiring the problem, the response will be to dive straight into the detail and focus on the minutiae of regulation (‘we agree that the EU needs better capital markets to improve the competitiveness of the EU economy…and the solution is to recalibrate the double volume cap for equities trading’).

Of course, reworking the EU framework for banking, finance, and capital markets is a highly technical and complex project. But the answer to bigger, better, and more integrated capital markets is not to be found in the detail of financial regulation alone.