Photo: Stephane Mignon

By Julian Müller, SOMO

A rather new item on the agenda of the European Commission is the Capital Markets Union (CMU). It is still in the conceptual stage, but the general idea is to integrate and deepen European capital markets with the goal of creating one single market for company shares, bonds and securitised bank loans that covers all 28 EU member states. Commissioner Jonathan Hill, who is responsible for the newly established DG Financial Stability, Financial Services and Capital Markets Union (DG FISMA), is officially tasked with establishing CMU by 2019.

Marketfinanced economy

There seem to be two motivations for pursuing CMU: first, making additional sources of finance available to stimulate capital investment by European non-financial businesses, especially small and medium enterprises (SMEs), and thereby stimulating growth and employment. SMEs tend to rely on bank lending, which, it is argued, has become problematic as banks give too little credit at a time when they are reducing their own debt levels and building up capital buffers, partly in order to comply with stricter prudential requirements introduced after the crisis. Therefore, CMU is primarily being discussed under the heading of “finance for growth”.

However, there is also a second, more long-term or structural goal: to shift the European economy with its traditionally strong reliance on bank financing to a more marketfinanced economy with bonds and investment funds, similar to the Anglo-American model. Of course, the idea of CMU is not entirely new and can be seen as part of the single market project in a more general sense. Measures like the mandatory introduction of International Financial Reporting Standards in 2005 already pointed in this direction. Some aspects of CMU were already outlined in the Commission’s “long-term financing” agenda (see its 2013 Green Paper and its 2014 Communication).

Integrate capital marktes

Nonetheless, the current CMU only started with Commission President JeanClaude Juncker’s opening statement before the European Parliament on 15 July 2014, in which he declared that to “improve the financing of our economy, we should further develop and integrate capital markets.” This was followed by a highprofile conference on “Finance for Growth” on 6 November 2014. On 28 January 2015, the Commission announced that it had started work on the CMU and that it intended to draw up an action plan by the third quarter of 2015 based on a phase of broad public consultation. A Green Paper to be adopted in February 2015 will outline the details. Establishing CMU will require an ambitious legislative agenda, the details of which are as yet unknown.

However, based on the discussion so far (see e.g. contributions by Nicolas Véron or Jacques de Larosière), some likely areas of legislative action have emerged. Nationally regulated and supervised financial markets will need to be harmonised and integrated; for example, the supervision of clearing houses that facilitate the derivatives markets. Securitisation of loans is to be encouraged and the related market for assetbacked securities is to be rekindled.

Europe 2020 Project Bond Initiative

European policy makers also see CMU as an instrument for financing infrastructure investment. In a similar vein, there is already an ongoing “Europe 2020 Project Bond Initiative” which channels money from capital markets into infrastructure projects such as motorways. Moreover, CMU supporters warn that if regulation that aims at improving financial stability is too restrictive, the financial system will not channel funds to non-financial enterprises, and that bank lending or the involvement of institutional investors in, for instance, the financing of infrastructure, will be stifled. Therefore, CMU is also likely to include a relaxation of existing rules or exemptions for certain types of financial institutions. For example, the Commission already presented a proposal to introduce a new type of investment fund called the European Long-Term Investment Fund. Generally, CMU may weaken the resolve to address problems of financial stability.

Financialisation of European economies

Can CMU help to stimulate investment and growth, as the Commission’s supply-side economists seem to claim? This is unlikely if, as many other economists and a recent report by Finance Watch argue, the sluggish development of the European economy has deep structural causes, especially demand constraints. If these are not tackled, deepening and expanding capital markets may in fact add to the financialisation of European economies and to a finance-driven capitalism that is correlated with weak investment in the real economy and financial instability.

However, it is also conceivable that addressing the current problem of anaemic growth in the EU is not even the main reason for this project. After all, even if positive effects on growth were likely, they would still be a long way off because the legislative framework for CMU is only expected to be in place by 2019. Add to this the time it would take for such stimulus to have real consequences in terms of investment, and we are easily talking about a minimum of five years before any positive growth and job effects are felt. It seems that current concerns about growth and jobs are paid lip service to pursue a more long-term agenda: shifting the European financial system towards more reliance on financial markets and less bank lending. This follows the new strategies of banks, away from strictly regulated lending towards more profits by offering capital market services.