Capital Markets Union 3.0?

The plan to develop deeper European Union Capital Markets (Capital Markets Union or CMU) was launched by Commission president Juncker and Financial Services Commissioner Jonathan Hill in 2014. It built on a decade or more of work to create a single market in banking, insurance and investment services which had led to more cross border financial activity, but failed to match the size and growth rate in US financial markets.

Stronger and deeper capital markets play a vital role in growing the European economy. They provide a valuable additional and more flexible source of financing to bank lending for European companies. They support growing the economy and the creation of new jobs and they allow citizens to participate in the success of national and international businesses.

Ten years of mixed success

But ten years on the story is decidedly mixed. Despite another wave of EU legislation, EU capital markets remain fragmented and relatively small. Perhaps most significantly, EU pools of capital such as pensions remain undeveloped in many member states. As a result, many EU corporates remain reliant on banks or profits for investment whereas in the US the public and private capital markets provide more financing and growth opportunities. And most EU citizens continue to save in cash in bank deposits and rely on state pensions in retirement. European capital markets continue to shrink as a share of global markets and European growth is low.

But not everything is bleak. EU capital markets are growing, and in some areas, like venture capital, we see even impressive growth. And some countries like Sweden, the Netherlands or Denmark provide excellent best practice models. We discussed this dilemma in a recent event in Brussels on the back of New Financial’s latest report on CMU. NF note that there are some success stories in some member states, notably Sweden and the Netherlands, but that the EU still lacks scale. As Max Bierbaum, the report author, told me, the EU is losing more ground to the US and must act fast to develop private pensions.

Renewed political ambition

There has been a major political push over the last 6 months on EU competitiveness, with the Eurogroup, ex ECB President Draghi, and ex Italian PM Letta all writing reports for the new Commission that include recommendations for CMU, now renamed the Savings and Investment Union (SIU).

President Von der Leyen’s recent Competitiveness Compass also includes ambitious plans. But as we discussed in our panel, action is really required at member state level. Bottom-up action to develop private pensions for example. Some have also called for top-down institutional reforms to foster more integrated markets by having EU level harmonised supervision of for example securities market infrastructure such as stock exchanges. This may come in time, but the focus for this Commission will certainly be on using its influence with member states to encourage structural reforms at national level.

The decision of the Commission to visit all member states, discuss with capitals what they expect and need from the capital markets union and how the Commission can support best member states ambitions is an excellent idea. The Commissions announcement to act as a facilitator and coordinator for member states, instead of new legislative action, is welcome and can lead to a promising path on getting all involved actors on board.

Stronger EU-UK cooperation on financial services can help

Capital markets are global by definition and we in the City have long supported an open CMU to facilitate growth. Therefore, an international mindset in developing stronger capital markets in Europe is important.

The conversation on how to reform capital markets in the EU and the UK is converging. Eurogroup president Paschal has outlined the common challenge both economies face in strengthening their capital markets in his keynote speech in the City in September. There is lots of ground for constructive EU-UK cooperation.

The City of London, as global financial centre can help in creating stronger capital markets on both sides of the Channel. We can provide a ready made vehicle to give access for EU savings to global markets and a ready made route in for non EU investors. Stronger interconnected capital markets between the EU and the UK would be beneficial to both sides and help bridging the investment gap in both our economies. Why not use it!

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.