1
From Jacqueline MillsManaging Director and Head of Advocacy, Association for Financial Markets in Europe (AFME)
TThe European Union (EU) is at a critical juncture and is facing a decline in its competitiveness on the global stage. With the European elections on the horizon and a new European Commission taking office later this year, now is the time to set a new political agenda for the next five years that can ensure the EU's vitality and competitiveness. The EU's policy approach to capital markets will play a key role.
Take the development of initial public offerings (IPOs) by European companies. Before the creation of the European Single Market, companies from the EU-27 member states accounted for 5 percent of global IPOs. After the first years of the internal market in the 1990s, this figure rose to 20 percent. But in the last three years, this statistic has fallen to around 7 percent. Many member states are understandably concerned about the lack of stock market listings in the EU, which represents a litmus test of the EU's ability to grow the companies it needs to maintain competitiveness. Nevertheless, companies are more likely to be attracted by the greater depth, liquidity and resulting higher valuations that non-EU markets offer.
Other key figures underline the challenge: The EU's share of global gross domestic product (GDP) is around 17 percent, but its share of the global total market capitalization is currently only 13 percent. Capital market financing for EU companies continues to average around 10 percent – a similar level to that recorded by the EU Association for Financial Markets in Europe (AFME) in 2018. Market-based financing now averages 26 percent in the United Kingdom and United States. The EU remains a predominantly bank-financed economy.
In particular, the EU faces additional challenges, including demographic pressures on public budgets and state pension systems. The search for ways to keep pensions financially sustainable in the long term in the context of an aging population means that citizens urgently need to look for suitable alternative retirement solutions. Sustainable change will place further strain on financial resources, as ambitious environmental goals require an estimated 700 billion euros annually.
Although European leaders are aware of these challenges, there appears to be no easy way to address them. Despite their ambitious goals, the Capital Markets Union (CMU) action plans of recent years have not led to fundamental changes. As the EU prepares for the upcoming European elections, the political agenda for the next five years needs to be designed with the aim of achieving a greater transformational impact.
Achieving greatness through coordinated efforts
Scaling capital markets requires an approach that includes both EU-wide and national initiatives. The challenge is to ensure that national approaches are aligned within a structured and coordinated EU-wide framework. If the focus is on bottom-up initiatives, where Member States focus exclusively on their home markets and only compete with their EU neighbors for market share in their respective areas of expertise, then the scale is required to attract capital and meet the economic needs within The EU's funding will fall short overall. Global competitive trends will not reverse. It is essential to explain and promote the concrete benefits of integrated markets within Member States and, above all, for Member States.
Addressing the pension challenge is a good candidate for this approach, starting with an intensive exchange of best practices arising from national experiences between Member States. A more ambitious strategy would be to build on this and previous evidence, for example from the experience of the Pan-European Personal Pension Product (PEPP). Ultimately, creating a European pension product with cross-border investments, portability and harmonized tax incentives wherever possible would be a transformative step.
Another strategic step would be to ensure that the development of liquidity in the EU stock market is at the forefront of the Union's policy objectives. Beyond its role in attracting capital and boosting valuations, robust secondary market liquidity is critical to driving growth in the EU. A proactive stance on this front will not only improve market dynamics, but also encourage EU listings and strengthen the overall resilience of the market.
The implementation of certain measures of the Capital Markets Union (CMU) Action Plan remains key, in particular the implementation of those agreed by the co-legislators under this mandate, such as the European Single Access Point (ESAP) and the so-called consolidated bands for stocks and shares Bonds. These initiatives have the potential to overcome the existing geographical fragmentation of EU markets by providing investors with centralized access to data – the first concerns information on the financial and non-financial performance of EU companies and the second information on the trading prices of securities. Both types of information will be visible to all investors, whether in the EU or worldwide, regardless of which country the company is based in or where trading takes place, which is not the case today.
There are two caveats to this. More needs to be done to change the attitudes that associate corporate champions with the need to be listed on a particular domestic exchange. Instead, the aim should be to promote the growth of EU companies by ensuring that those wishing to go public choose an EU listing venue, regardless of country. In order for a consolidated tape to provide meaningful information about stock prices, the current design of the tape will require some adjustments, particularly the inclusion of larger levels of the order book than is currently provided for pre-trade information. This can happen relatively quickly if Member States look beyond existing commercial interests.
To further remove obstacles to capital market growth, removing long-standing obstacles will also be of paramount importance. Here, withholding taxes and the harmonization of corporate insolvencies require special efforts on the part of the Member States in order to quickly agree on the proposals currently being negotiated. A new area to consider in the coming years could be the harmonization of civil liability in relation to prospectuses, particularly in relation to forward-looking information, as this will increase transparency for investors while providing greater clarity to issuers and their advisers about their potential liability risks.
Finally, the use of new technologies will be central to promoting competitiveness and efficiency. The introduction of distributed ledger technology (DLT) promises optimized trading and post-trading processes, resulting in lower operational costs and improved liquidity.
Furthermore, it is important to recognize that direct market-based financing may not be a solution for all types of businesses and in all situations. In this regard, securitization can be a tool to bridge the gap between traditional bank and market financing mechanisms. It can transfer risk from banks' balance sheets, freeing up capital that they can deploy for additional lending. It is now well documented that the EU is lagging behind in this regard. In June 2022, annual securitization issuance in the EU and UK accounted for just 1.2 percent of total bank loans outstanding, while in the US, annual securitization issuance accounted for 12.6 percent of bank loans outstanding over the same period. To overcome this, recalibrating regulatory treatment by banks and insurers, reviewing investor disclosure frameworks and supporting the emerging ESG (environmental, social and governance) securitization market are essential. In all of these areas, EU policymakers can make a difference.
Paving the way to competitiveness
Europe is at a turning point and requires a new approach to its capital markets policy. The declining number of IPOs in the EU and the relatively low global market capitalization highlight the urgent need for change. As the EU enters a new phase with the upcoming elections, a comprehensive and ambitious political agenda is crucial.
The path to a more competitive and resilient European economy requires joint efforts. Coordinating initiatives at EU and national levels is not just a question of practicality; It is essential to achieve the scale and integration of capital markets required to position Europe competitively on the global stage. If successfully pursued through a shared commitment to structured coordination and strategic action, this path will pave the way for a resilient, dynamic and globally competitive European economy.
ABOUT THE AUTHOR
Jacqueline Mills is Head of Advocacy and is responsible for formulating and implementing the Association for Financial Markets in Europe (AFME)'s advocacy efforts towards the Association's external stakeholders in the EU-27 and the UK. Before joining AFME, Jacqueline was Head of Asset Finance Policy and Research at Leaseurope, the European leasing association, and has also worked for Deloitte and Eurofinas in Brussels.
Comments are closed.