This is an excerpt from Global Counsel's latest publication Europe in the Global Economy, which can be downloaded in full here.
The capital markets union (CMU) initiative demonstrates the difficulty and the necessity of diversifying dependence on bank finance in the EU. The Juncker Commission asked not what the EU should do to financialservices, but what financial services could do for the EU. This led to new EIB-run investment funds, initiatives to tackle cross-border fundraising barriers and proposals for more portable investment products and harmonised insolvency proceedings. These have had mixed success.Funding programmes for start-ups and SMEs could provide enough ‘proof of concept’ to ensure the CMU agenda continues. But a lack of financial infrastructure in several countries and continued reluctance by regulators to embrace cross-border investment, means political will is required if the CMU is to become more than just a catchall label for a disparate set of initiatives.
Moving beyond the Juncker Commission’s headline objective of “more investment” may mean making judgements about what kind of investment is preferable. With the economy in a healthier state, politicians may feel they have more scope to direct capital in favoured directions. This has begun with schemes to encourage long-term infrastructure investment and regulatory reliefs to incentivise funding of SMEs. The next call will be to mobilise capital for sustainability objectives. Here, the current Commission has effectively ducked the difficult decision: agreeing at this stage only to classify what counts as “green” and what does not. It will be for its successor to decide whether to incentivise such investments or punish “brown”, and whether that is best achieved by mandatory regulation or by behavioural nudges. That may mean a trade-off between higher immediate economic growth and something slower but ultimately more sustainable. High level rhetoric may favour the latter, but an increasingly cut-throat global economy may mean increased pressure to opt for the former.
Losing the EU’s largest capital market and a dissenting voice on harmonisation could make agreement more straightforward, but this is not guaranteed. Some will see Brexit as an opportunity to push ahead with a more centralised, federalist vision of EU capital markets and their regulatory framework. But the UK was never the only member state resistant to this: Ireland and Luxembourg remain wary, given the specialised nature of their domestic markets, while Poland and Hungary (and now Italy) are resistant to “more Europe” in general. If a top-down approach to market liberalisation proves politically challenging, the next Commission may look either at bottom-up initiatives — such as the regional capital markets union launched in the Baltics — or parallel measures, like the creation of a pan-European personal pensions product, to make the case for cross-border finance on a commercial, rather than political basis.
CMU sought to make EU capital markets rival the US, but Brexit removes its largest, most mature capital market
The challenge is made harder by the variation between member states