A fresh take on the capital markets union
This week brought the news that France, Germany and the Netherlands have issued a joint call for policymakers to refocus on delivering a capital markets union (CMU).
They’re calling for a group of EU experts to draw up plans by the end of September that details how to overcome barriers to cross-border investment and boost financing channels for corporates.
This EU project has stated intention of driving closer integration of capital markets across Europe. In practice this means encouraging companies to raise capital by issuing stocks and bonds, rather than borrowing from EU banks. It’s about distributing risk more efficiently across the economy, and as such, it’s a key aspiration for Europe.
The role of Brexit
CMU has been on the cards since 2015, but Brexit has intensified the top-down push from Europe’s power brokers towards integration. This latest intervention explicitly stresses that Britain’s decision to leave the EU – taking the City of London with it – increases the importance and urgency of the CMU.
CMU was originally intended to make it easier for investors in London to trade across borders. With the UK out of the picture, the latest incarnation of the plan seeks to build alternative capital markets that can compete with London. That’s the conventional wisdom, anyway.
Us and them
The relentless drive towards a CMU is about more than petty one-upmanship over post-Brexit London. It reflects a desire on the part of Euopean policymakers to emulate (and perhaps even challenge) the hegemony of the US capital markets.
The headline call to action has always been that in the USA, roughly 80% of funding comes from capital markets securities and 20% comes from bank lending, while in Europe, 20% comes from the capital markets and 80% comes from banks. CMU is intended to normalise this discrepancy and steal market share of capital markets transactions from the US banks.
What progress has been made?
The answer is some. The EU has already agreed to simplify prospectuses for equity investments, grant businesses more protection from creditors and create a pan-European personal pension product.
But in reality, CMU has stalled. After the dormant project was reheated in 2017 with the adoption of a raft of new EU laws, most corporates in Europe continue to rely on bank lending as their primary source of capital. Significant challenges remain, including divergent tax and insolvency laws across jurisdictions, vested interests that inhibit competition and duplication of services.
A new perspective
CMU is an ambitious project and one that will benefit banks, markets and ultimately, real economies across Europe. Sitting in the office here in London, a short hop from the epicentre of London’s financial district, I am reminded of the need to look beyond the simplistic “us versus them” narrative that tends to colour talk of the CMU amongst media commentators and even policymakers on both sides of the Channel and the Atlantic.
CMU might actually be a good thing for the City of London and US financial centres too, since legal and regulatory heterogeneity across various European countries is an obstacle to collaboration. CMU would ultimately make it easier for market participants in Paris, Frankfurt and Amsterdam to do business with counterparts in London and New York.
Financial services is not a zero-sum game, despite what politicians might have us believe. Capital is global and the businesses that thrive seek partnerships across borders, economies and regulatory regimes. Nowhere is this more true than London, which has benefited from servicing Europe’s need for financial services, not just the UK’s. CMU isn’t a threat to financial services in the UK and the US – it’s a massive opportunity.