Discussing the plans of a Capital Markets Union in Europe

On 19 January 2015, Nicolas Véron, Senior Fellow at Bruegel and a visiting fellow at the Peterson Institute for International Economics in Washington, D.C., held a SAFE Policy Lecture entitled “An Agenda for Europe’s Capital Markets Union”.  He was introduced by Hans-Helmut Kotz, Program Director of the SAFE Policy Center.

Véron began his presentation by recounting that a ‘Capital Markets Union’ (CMU) for Europe was first announced in July 2014 by the new President of the European Commission, Jean-Claude Juncker. With CMU, the European Commission plans to strengthen the non-bank segment of Europe’s financial system. It is widely believed that events since the 2007/8 financial crisis prove that the banking sector's dominance in the provision of finance can be an impediment to recovery and growth. CMU would aim at rebalancing bank-based and non-bank financing, thereby making Europe’s financial system more efficient, competitive and more resilient in times of financial crises.

According to Véron, developing equity and credit markets beyond banks will be especially crucial to finance high-growth companies in services, which have little collateral to offer, but will be significant motors of job growth in the near future. In this light, CMU is seen to better respond to the financing needs of the Single Market. The Commission will publish a Green Paper on CMU in the coming weeks. Furthermore, an action plan on financial services is expected to be presented in summer 2015. Both will bring more clarity to the concept of CMU.

Véron continued by sketching two possible approaches that the Commission may employ for CMU: an “industrial policy” approach, which would essentially select individual credit market segments and financing instruments (such as securitization, covered bonds or European Long-Term Investment Funds (ELTIFs)) to be developed further by a harmonized European framework. This would be the easier approach. The more difficult one, very likely also the more effective one for fostering a growth-friendly environment, would be the so-called “ordoliberal” approach, whereby framework conditions for financial markets would be adjusted to provide the basis for the development of efficient financial services and contractual arrangements. In this context, Véron highlighted a number of current regulations which would need to be reviewed, in order to overcome market fragmentation and impediments to growth; ones related to insolvency and debt restructuring frameworks, tax laws, supervision and resolution of financial institutions, the prudential frameworks for insurers and pension funds, as well as accounting and auditing standards. While the ordoliberal approach would stir up a lot of political controversy, Véron sees an opportunity in the political momentum for change the announcement of CMU has triggered. This could and should be used to redeem the higher potential for growth development promised by a fundamental over-haul of the framework conditions for financial markets.

Véron also touched on the political strategy embedded in the CMU agenda. The UK may view the CMU agenda as a positive signal for its ties to the EU. The UK financial system has clear comparative advantages in the market segments to be developed and it is certainly also a strategic political statement that a British Commissioner (Jonathan Hill) was assigned to develop the agenda for CMU.

A lively debate followed the lecture, touching also on the negative aspects of the US’ capital markets and the question of whether they should be emulated in Europe, the challenge to regulate capital markets and how vested interests can be overcome.