EU Capital Markets Union Still a Glimmer in Juncker’s Eye

European Union policy makers have come up with a big new idea to drive investment and economic growth by building a “capital markets union.” Now they have to figure out what that means.

Jean-Claude Juncker, president of the new European Commission, issued the call back in July, telling EU lawmakers that developing and integrating capital markets “would cut the cost of raising capital, particularly for small and medium-size enterprises.” It would also “help reduce our very high dependence on bank funding,” he said.

Since then, everyone from the European Central Bank to lenders and exchanges has come forward to fill Juncker’s slogan with content. Notably absent in the clamor is the commission itself, the bloc’s executive arm, which will be in charge of coming up with the plan.

“If you ask ten different people, you’ll get ten different answers as to what capital markets union means,” Verena Ross, executive director of the European Securities and Markets Authority, told U.K. lawmakers on Oct. 28.

The idea may be new, but the problem it tries to address isn’t. In Europe, 85 percent of financing comes from banks, yet lending to euro-area companies and households has contracted in annual terms every month for the past two and a half years.

For small companies, which are “particularly dependent on local bank finance,” the situation is dire, according to the commission. A third of small companies that apply for credit in Greece get the full amount. Half do so in Spain and Italy, compared with a euro-zone average of 65 percent.

‘No Common Understanding’

And economic expansion in the currency bloc is anemic. The commission cut its growth forecasts on Nov. 4 to 0.8 percent this year and 1.1 percent in 2015.

ECB Executive Board member Yves Mersch acknowledged on Oct. 22 that while expectations for the planned capital-markets union are high, “there is no common understanding of what it means or what it should look like.”

“For the financial industry, it means new business opportunities; for financial stability experts, it means better control of shadow banking; and for entrepreneurs, it means better access to funding sources,” he said.

Ideas put forward by Mersch include rule changes to destigmatize securitization, addressing the “heterogeneity of insolvency rules across the EU” and bringing down the costs of settling cross-border securities trades.

The task of delivering a coherent plan falls to Jonathan Hill, the new EU commissioner for financial stability, financial services and the capital markets union. During the appointment process, Hill shared some thoughts on the subject.

Securitized Debt

He echoed Mersch’s call for steps to revive the market for high-quality securitized debt, a policy also pursued by his predecessor as commissioner, Michel Barnier.

Hill also pledged to deepen “where necessary and possible” the EU’s efforts to build a common set of rules for its financial-services industry, such as “in company, securities and insolvency laws.” He also said he’d try to “tackle barriers” in areas such as taxation.

Hill kicks off a conference in Brussels tomorrow devoted to the capital markets union that will also feature Juergen Fitschen, co-chief executive officer of Deutsche Bank AG, and ECB Supervisory Board Chair Daniele Nouy.

The EU’s efforts to centralize supervision and resolution of lenders in a banking union helps to lay the groundwork for the latest plan, Nouy said last month. “This will be an extremely important step forward for European integration and toward a future capital markets union,” she said.

‘Final Blueprint’

“The final blueprint is going to have to contain far more than just continuing with some of the work that Barnier set in motion,” Nicolas Veron, a fellow at the Brussels-based Bruegel research group, said in an interview. “It will need to look at difficult areas such as tax rules and insolvency law.”

Rather than try to deliver a detailed blueprint early in his five-year term, Hill has called for an open discussion and a study of market barriers -- a “bottom-up approach” with an action plan to follow next year.

Companies are also eager to promote the capital markets union, relishing the shift in the EU’s regulatory focus from a crackdown on risk taking to boosting investment.

Plans put forward so far include a call from the Federation of European Securities Exchanges for the EU to adopt a numerical target for the share capital markets should have in financing the economy, backed up by policies such as further efforts to standardize accounting standards, and the establishment of an “investible” index for small businesses.

Hill is right to take time to identify the right package of measures, Mersch said in his speech, adding that he too doesn’t have “a ready-made blueprint in my bottom drawer.”

Still, the project will require the EU to “spell out more clearly what we want and what we do not need, what we can achieve and what we should not attempt,” he said. “This way we can prevent the capital markets union from becoming a jack-of-all-trades, master of none.”

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