It is an inconvenient truth for European policymakers that the capital markets of the European Union are much smaller and less efficient than those of the United States. Therefore, European companies are much more reliant on bank financing than their US counterparts. When banks started to get into trouble during the financial crisis and regulators increased capital and prudential requirements for banks, this resulted in many European small and medium sized enterprises (SMEs) confronting difficulties in obtaining finance. Hence, there are good reasons to strive for a European economy that has a more diverse financial basis.
The capital markets union (CMU) can certainly be part of the broad overall strategy. However, the European commission’s proposals presented in its green paper needs to be taken with a grain of salt.
"The CMU cannot be completed through a single piece of legislation, but must consist of wide ranging complementary measures"
First, the overall timeline lacks ambition. The commission's proposals aim to deliver the foundation for a CMU by the end of the legislative term in 2019. While there is certainly some merit in an approach that allocates enough time for in-depth discussions, a four year period for foundation work is too unassertive for a project of this magnitude.
Seven years after Lehman Brothers went bankrupt obtaining external financing for many companies remains a struggle, although there has been incremental progress over recent months. However, ongoing funding problems and the sorry state of the economies of many member states, requires swift and decisive action. Furthermore, this specific combination of circumstances gives CMU a certain momentum, which might be lost if we continue to wait.
The second concern I have is the limited scope of the commission's green paper on the CMU. Currently, there are only two tangible elements to the CMU, a revitalisation of the market for securitisation in Europe and the recasting of the prospectus directive aimed at facilitating SME access to financial markets. Both objectives are laudable but difficult in terms of technicalities as well as politics. Even both together will hardly be enough to kick-start growth in the EU.
Fortunately, the commission consults on a wide array of different measures including crowdfunding, the development of a high-quality framework for covered bonds, and a recalibration of capital requirements under solvency II rules. A wide array of measures will be needed to make a difference, but to ensure success, concrete and tangible proposals need to be put onto the table – and this should be done sooner rather than later.
"During the financial crisis, we have seen that the conservative business model that Europe uses to finance its economy has by and large worked"
With the CMU, the EU needs to make decisive moves but not overturn areas that are working. As with any other piece of legislation, even a broad strategy such as the CMU must be compatible with the framework that already exists. During the financial crisis, we have seen that the conservative business model that Europe uses to finance its economy has by and large worked.
Arguably, more diversification would have been an asset to have the possibility of countering the cuts in lending that were applied by some banks. However, this does require a complete overhaul of the European financing model, but for a targeted adjustment to what is already in place and works well.
In summary, what do we need in order for CMU to be successful? I believe that sticking to three overall objectives and guidelines will serve us well. First, we need quick and decisive action to capitalise on the existing momentum. Second, the CMU cannot be completed through a single piece of legislation, but must consist of wide ranging complementary measures. Third, all new provisions must be compatible to the maximum extent with what currently works well. If we can stick to these guiding principles the CMU can and will be a success.
The parliament and the economic and monetary affairs committee will be a major player in this process and is ready and willing to work together with the other institutions to continue the journey towards safer, more transparent and more efficient financial markets in Europe.