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Report: A new sense of urgency – the future of capital markets union

November 2019 • Unlocking capital marketsby Panagiotis Asimakopoulos and William Wright

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This report analyses the progress made by the capital markets union project so far, underlines why Europe needs more capital markets – and why it needs more integrated capital markets. It outlines a more ambitious and more focused roadmap for CMU over the next few decades that combines ‘top down’ initiatives at an EU level and ‘bottom up’ initiatives at a national level to build bigger and better capital markets.

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Capital markets union is five years old. Depending on your view, CMU is either an ambitious initiative to reduce the EU economy’s reliance on its struggling banking system, map the challenges facing capital markets in the EU, and lay the foundations for further growth in the decades ahead – or a missed opportunity for fundamental reform that avoids the difficult questions and that will do little more than tinker at the edges of the problem.

This report argues that while the concrete output from CMU over the past five years has been relatively modest, a lot of the criticism levelled at the CMU project is unfair. Not least, CMU has put capital markets on the political agenda and – for the first time – has framed capital markets as part of the solution to Europe’s economic and social challenges, instead of being part of the problem.

However, the EU and individual member states need to inject more urgency and ambition into CMU if it is to deliver on anything like its promise. This report outlines what we think is an ambitious but achievable roadmap.

Crucially, we draw a clear distinction between ‘top down’ initiatives at an EU level (‘more union’) to drive more integrated capital markets, and ‘bottom up’ initiatives in individual member states (‘more capital markets’) to build capacity. Too much of the focus of CMU over the past five years has been on ‘top down’ initiatives. While it is vital that CMU continues to focus on these areas, transformational change in EU capital markets can only be achieved if individual countries commit to building deeper capital markets from the ‘bottom up’.

The report addresses the following questions:

  • What has CMU achieved so far and is it on track?
  • How have European capital markets developed over the past five years?
  • Why does Europe need bigger capital markets? And why does it need more integrated capital markets?
  • What are the key levers that the EU and individual member states can pull to drive growth in capital markets?
  • What should be the guiding principles for the next phase of CMU?
  • And – perhaps most importantly – what policies can the EU and individual member states implement?

We are particularly grateful to more than 40 guests who took part in a series of workshops over the summer to thrash out some ideas for this paper; and to our members for their support of our work in making the case for bigger and better capital markets in Europe.

Here is a short summary of this report:

1) A strong backdrop: capital markets in Europe are heading in the right direction. The value of capital markets activity has increased by almost 50% across 28 different sectors in the five years since the launch of the capital markets union, and activity has increased in all but one sector. While this growth cannot be attributed to the CMU project it has provided a strong backdrop for it.

2) On the agenda: while the concrete output of the CMU project has been relatively modest in its first five years, we believe that much of the criticism of CMU has been unfair. Most importantly, CMU has put capital markets on the political agenda and – for the first time – has framed capital markets as part of the solution to Europe’s economic and social challenges, instead of being a big part of the problem.

3) The main barriers: in the coming decade the EU will have to work hard to ensure that CMU overcomes the main barriers that have limited its progress so far. Most obviously, it will need closer political alignment between the European Commission, European Parliament and member states – and a concerted effort by the financial services industry to regain the trust of European policymakers and citizens.

4) More capital markets: the arguments that made a compelling case for CMU back in 2014 are even more compelling after Brexit. The EU27 needs bigger and deeper capital markets to reduce its reliance on bank lending, to diversify funding for companies, to help address the pensions time bomb, and to help fund the investment needed to address climate change. Much of this work needs to be done at a national level.

5) More integrated capital markets: the EU also needs more integrated capital markets. Despite significant progress over the past few decades, EU capital markets are largely a patchwork of 28 national markets. EU-wide initiatives to help integrate capital markets can help drive growth and reduce costs, but will not be enough on their own.

6) Some principles for the next phase: five core principles can help guide the next phase of CMU: i) a clearer distinction between ‘more union’ (EU-wide initiatives to drive integration) and ‘more capital markets’ (at a member state level); ii) making a better case for capital markets; iii) a more focused and prioritised action plan; iv) a focus on competition and transparency; and v) an ‘open CMU’ that retains a global perspective.

7) Regulation and supervision: redesigning the supervisory and regulatory framework in the EU will not on its own create a CMU, but it will be impossible to have a fully-integrated capital market without significant change. Moving towards centralised markets supervision and redefining the mandate for regulators will be an important step.

8) Deeper pools of capital: you cannot have deep capital markets without deep pools of capital. This should be the top priority for the next phase of CMU. While pensions reform is beyond the remit of the EU, it can work closely with member states to incentivise and encourage best practice, such as the phased introduction of auto-enrolment workplace pensions.

9) Laying the foundations: there are few better examples of the barriers ahead to CMU than the complex patchwork of stock exchanges and market infrastructure. The EU should encourage more consolidation, more competition, and more transparency to accelerate closer integration. At the same time, it can work with member states to develop a more appropriate and consistent tax regime to incentivise more investment and a longer-term focus.

10) A national prerogative: ultimately most of the big levers to encourage the growth of bigger and better capital markets can only be pulled by individual member states. If national governments want to ensure that companies in their country have access to a diverse range of short- and long-term funding to invest in jobs and growth, that savers have access to low cost and sustainable investment and retirement products, and that cross-border investors want to invest in their country, it is up to them – and not the EU – to act.

The full report includes:

  • Analysis of the change in the value of capital markets activity across 28 sectors of the capital markets in the EU28 and EU27 over the past five years
  • Analysis of the change in depth of capital markets activity (relative to GDP) in those sectors over the past five years
  • Analysis of the range in the depth of capital markets in all 28 EU member states
  • A ranking of EU countries by the depth of their capital in aggregate and across five core sectors (pools of capital, equity markets, bond markets, asset management, and private equity / venture capital)
  • A 10 point summary of the benefits to the EU economy of bigger and deeper capital markets
  • A 10 point summary of why the EU needs more integrated capital markets and how fragmentation is holding back growth
  • Analysis of the progress that CMU has made over the past five years and the main barriers it has faced
  • Analysis of the importance of developing deeper pools of long-term capital (mainly pensions and insurance assets) to drive the growth of capital markets
  • Analysis of the importance of the wider business, legal and regulatory environment in individual countries in supporting deeper capital markets
  • A roadmap for CMU – five guiding principles for the next phase of CMU
  • A roadmap for CMU – suggested policy recommendations in four main areas: i) regulation, supervision and standards; ii) building deeper pools of capital; iii) market infrastructure, exchanges and equities; iv) tax and incentives
  • A checklist of 10 questions for national governments, regulators and politicians on what individual member states can do to drive growth in capital markets from the bottom up

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