If the European Union wants to create a true capital market for the 28-nation bloc, it should start early on difficult issues such as harmonizing insolvency law, the European Central Bank said.
“The effectiveness of the CMU project will depend on the level of ambition with which it is pursued,” the ECB said in a response to an EU discussion document published on its website on Thursday. The need for quick wins shouldn’t “preclude early action in areas which are key for the functioning of capital markets, such as addressing problems in national insolvency laws or harmonizing key elements of insolvency law, corporate law and taxation of financial products.”
The EU is seeking to strengthen sources of funding to the economy that don’t come from banks as part of its response to the financial crisis. By making it easier for citizens to invest in equity and other markets, officials hope to spur more balanced investment across member states.
“Capital Markets Union has the potential to complement the Banking Union, strengthen Economic and Monetary Union and deepen the Single Market,” the ECB said. “It could support the smooth and homogeneous transmission of monetary policy and help foster financial stability, inter alia by supporting more cross-border risk-sharing, creating deeper and more liquid markets.”
Efforts are already under way to boost equity markets and diversify funding sources, such as by simplifying securitization practices. Even so, the complexity of legal arrangements for taxation, corporate law and insolvency in the EU present an obstacle to easy cross-border investment. The ECB said action needs to includes all members.
“An important impediment to the development of equity financing is the bias in taxation observed in many member states,” the ECB said. “Initiatives in taxation should therefore aim to reduce the preferential treatment of debt financing.”