Capital Markets Union
[3] The reasoning behind the idea was to address the issue that corporate finance relies on debt (i.e. bank loans) and the fact that capital markets in Europe were not sufficiently integrated[4] so as to protect the EU and especially the Eurozone from future crisis.
The CMU project meant centralisation and delegation of powers at the supranational level with the field of macroeconomic governance and banking supervision being the most affected.
[11] This is also highlighted in her bid for the presidency of the European Commission during the process of election as the main economic motto of her campaign was "An economy that works for people".
[2] The Treaty of Rome, establishing the European Economic Community in 1957, already expressed the necessity to instaure free movement of capital in between the member states.
According to the OECD analysis, this is partly due to the fiscal bias: in most European countries, firms benefit from tax advantages if they have to reimburse a bank loan, but that is not the case if they emitted obligations on the capital markets.
[7][16] SMEs, which have particular difficulties in integrating the financial markets but which represent a good share in the created value of the European firms, largely contribute to this tendency.
Whereas the United States population choose to invest in long-maturity-assets through pension funds or life insurances, European savers prefer easily accessible financial instruments, such as deposits or short-maturity-assets.
[2] This economic behaviour generates a lack of financial profitability of the EU and accentuate the importance of banks as the main funding providers of the European economy.
[18] Even if before 2011, there was a positive trend for cross-border investments, most of the capital flow was remaining within the national frontiers of the member states[16] and European financial integration is still limited.
[19] In fact, shareholders prefer buying shares from their national companies, creating an important hindrance to European financial integration, because they have to face regulation barriers if they want to invest in another country of the EU.
[21] In spite of that, the European Commission asserted the consistency of the Capital Markets Union action plan, already launched at the time, and accelerated the efforts to implement it.
[7] The European Commission designed 3 different levels of objectives for the Capital Markets Union, from the global economic goals to the more concrete necessity for the construction of an integrated financial system.
[22] As it might be complicated for a small firm to produce the information necessary to enter the capital markets,[7] the CMU's purpose is to set up the required execution infrastructures to ease their access.
[22] The idea of the project is that legal certainty that they are no going to loose suddenly the wealth they have invested will encourage the use of capital markets as a good mean to yield a profit from the savings rather than keeping it on a bank account.
[7] As explained previously, the harmonisation of the regulation across the European Union would allow investors to enter other member-state's capital market more easily.
[32][33] This translated into 2 main actions, the first aiming at strengthening feedback given by banks declining SME credit applications and the second by mapping existing local or national support and advisory capacities across the EU to promote best practices.
[citation needed] Since the European economy is mainly reliant on the banking sector, the fifth priority axis aims at reducing this reliance but also strengthen capacity in order to face crisis more efficiently.
[49] Having regard to that, the Commission proposed strengthening local financing networks by expanding the possibility for EU countries to authorise credit unions outside the capital requirements directive and regulation.
[53] Other actions include the fostering of convergence of insolvency proceedings by introducing the so-called Insolvency law;[nb 5] removal of cross-border tax barriers with the creation of a code of conduct for relief-at-source from withholding taxes procedures[54] and the conduct of a study on discriminatory tax obstacles to cross-border investment by pension funds and life insurers launched in 2016; strengthening of supervisory convergence and capital market capacity building through a Strategy on supervisory convergence to improve the functioning of the single market for capital; a White Paper on ESAs' funding and governance and; technical assistance to Member States to support capital markets' capacity leading to the adoption of Regulation 2017/825 [nb 6] and; the enhancing of capacity to preserve financial stability by a Review of the EU macroprudential framework.
[56] After the UK's decision to exit the EU, Valdis Dombrovskis, took on the portfolio with a strong commitment to push the CMU agenda through, specially after Brexit.
The European Securities and Markets Authority (ESMA) has been charged, by the commission, to carry out assessment reports of the progress, most notably in the field of retail investment, for instance.
[21] Moreover, as the effects of such structural reforms can hardly be observed in the short term, it is difficult to analyse the results of the Capital Markets Union action plan without a bigger time perspective than we have today.
[2] Since taking office, president Ursula von der Leyen has taken ahead the process of completing the Capital Markets Union project.
[89] The new Action Plan consists of 16 measures aiming at achieving 3 key objectives: The new measures proposed are:[90] In October 2020, as mandated by Regulation 2019/2115 as regards the promotion of the use of SME growth markets, the European Commission set up a Technical Expert Stakeholder Group on SMEs (TESG) that brought together relevant stakeholders with technical expertise on SMEs’ access to finance.
The Bank for International Settlements outlines that financial markets development accumulates debt and does not improve the real economy and growth as it benefits from high-collateral and low-productivity projects generating misallocation of resources.
Nevertheless, the introduction of the Basel III restricted banking lending and put Capital Markets as an alternative for European business to raise funds.
[59] In the field of SMEs, the CMU aims at giving access to Venture Capital and lowering costs for funding, however it can lead to shorter holding periods of investment and to great volatility.
All-in-all this limits the scope of the CMU project through the process of de-risking larger banks and relegating SMEs which in turn concentrates the risk in less agile financial actors.
[94] The Simple, Transparent and Standardised regulation which should make it easier for investors to assess risk, still lacks clarity and clear definitions as it paves the way for private entities to interpret it in a broader way undermining its scope.
[100] Nonetheless, the project has not managed to deliver this so far and with the UK's exit, it seems unlikely that efforts will be made in this field as other financial centres will compete to take London's place in the continent.
