An update on the CMU from the heart of Europe
This week on the blog, Rainer Wagner – who flies the flag for Origin from Frankfurt – gives his take on the state of the EU’s Capital Markets Union project.
Schengen has become a politically charged word. But for me, it has personal significance.
I grew up near the border to Luxembourg and France, so not far from Schengen, a Luxembourg village on the Mosel river. I benefited directly from the implementation of the Schengen Agreement in 1995, as it made crossing nearby borders to Luxembourg and France easy.
The agreement had many positive implications for my region, as well as the rest of Europe: free flow of labor between the countries (a lot of my old friends still live in Germany and work in Luxembourg), a large number of Luxembourg students at my home university of Trier (always good fun), and an easy way to see original language movies shown in Luxembourg!
Live long and prosper
I can hardly imagine what it required from politicians to come to this agreement, even if the initial agreement “only” involved BeNeLux, Germany and France.
It meant a lot of compromises for individual countries (giving up border patrols, flow of undeclared and untaxed money and illicit goods etc), but it has helped to create prosperity within Europe.
Migration may pose a challenge to the Schengen Agreement, but the fundamental value of free movement is more highly prized and protected than ever, and the EU has the means to tackle the challenges.
The origins of the CMU
Jean-Claude Juncker – long-serving prime minister of Luxembourg and then President of the European Commission – launched the Capital Markets Union (CMU) initiative in 2015, around the time that Origin got started.
Although the CMU has struggled to gain widespread traction so far, it’s a crucially important policy objective that will really benefit Europe – if policymakers can get it right and strike the right compromises.
The CMU was originally intended to create a single European market for capital – initially including London as a financial services stronghold. But the renewed drive towards a CMU is about more than post-Brexit one-upmanship. The idea is to remove barriers to cross-border investment.
These barriers include diverging and inefficient insolvency frameworks or withholding tax rules, and to strengthen EU-wide passports for the provision of services. This will in turn help companies tap into larger pools of capital held by institutional and retail investors across the EU. The end result should be greater choice (and lower cost) of funding for corporations.
The CMU also seeks to support the EU’s green and digital agendas. Ultimately, the project aims to increase the single market’s global competitiveness and autonomy, making the financial system deeper and more resilient.
Where are we now?
The action plan for the CMU included a push to “integrate national capital markets into a genuine single market”. The creation of that single market for capital in the EU remains a work in progress, but some progress has been made.
Advances include the Commission’s proposal to simplify the settlement of securities, the Council's agreed positions on certain 2021 legislative proposals and items of the 2020 Action Plan, as well as the newly proposed Listing Act.
But much work remains to be done in order to deliver on the promise of a CMU.
Work to be done
Member states must address diverging regulations, harmonize insolvency frameworks, and integrate market infrastructure that is currently fragmented (a clear manifestation of which is the heterogeneity of number issuing formats, individual CSDs, and number of ISIN agencies).
Jörg Kukies, State Secretary Financial Market Policy and European Policy at the German Federal Ministry of Finance (and former investment banker), has argued that “an important first step to bring forward the CMU would be the short-term revision of the core regulatory framework for financial markets in the EU (MiFID II and MiFIR).”
There is a clear need for targeted improvements, and this has been reinforced by Brexit. Mr. Kukies believes that the Commission should therefore intensify its work on the MiFID II/MiFIR review and prioritise a legislative proposal.
The heart of Europe
Relevance, efficiency, and competitiveness can only be achieved through harmonization and standardization.
As a fintech operating in this environment, Origin would certainly be a beneficiary of the goals promised by the CMU. This would significantly reduce the need to tailor documentation, and the number of required integrations to serve all of our customers in Europe.
As a strong believer in the EU, who also supports a football club (Eintracht Frankfurt) "in the heart of Europe", I’m convinced that we all need to pull together to deliver on the true potential of the single market. Individual member states will need to compromise to make the CMU work.
With the demographic developments projected in Europe and pre-existing shortage of labour, everyone within the EU has an interest in improving processes for the benefit of us all. Now more than ever, we need a new Schengen Agreement for the CMU.
