BRUSSELS, July 11 (Reuters Breakingviews) – Europe wants to discourage its domestic innovators from going abroad in search of new finance and not just new sales. But national barriers make the European Union’s internal market more of a dream than a source of funding. Far from creating red tape, common supervision is an advantage the EU could offer its entrepreneurs.
EU leaders regularly stress the importance of the “Capital Markets Union” – a coveted single financial market – in their quest to increase competitiveness and mobilize economic resources. Rising trade tensions with China and the EU’s desire to strengthen its economic security in the wake of the pandemic and Ukraine war have only underscored the importance of the project.
However, today the EU is far from unifying its capital markets. Instead, innovators and incumbents face a funding maze that is split along national lines. Growing companies are simply turning elsewhere, such as Irish training software maker Glofox, which was sold to Arkansas-based ABC Fitness Solutions in a deal in 2022.
According to a 2021 report by London-based firm New Financial, European stock markets are less than half the size of their U.S. counterparts by market cap, but the bloc has more than three times as many exchange groups. The think tank calculated that in Europe, including trading partners like the UK and Switzerland, there are 22 different exchange groups operating 35 different exchanges for listings and 41 exchanges for trading. In addition, there are almost 40 different central counterparty securities accounts and clearing houses that take care of the “installation” of the financial markets. In comparison, the United States has seven exchange groups, three listing exchanges and 16 trading exchanges, as well as one clearing house and one custodian.
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Fragmented markets mean less trading and fewer IPOs. That, in turn, pushes promising companies elsewhere when it’s time to grow. The EU’s share of global capital markets has fallen from 19% in 2006 to just 9% in 2022, according to New Financial’s analysis of sectors including venture capital, IPOs, pension funds, equity and bond markets. Early-stage funding in Europe totaled €131 billion between 2018 and 2022, compared to €949 billion in the US, UK and Canada combined. Europe’s longstanding culture of risk aversion, reliance on bank credit and fragmentation have left its markets unable to keep up with the economy, which is the third largest in the world by GDP.
Even if Europe produces unicorns, defined as startups valued at $1 billion or more, such as direct-to-consumer aggregator Berlin Brands Group, Belgian software maker Collibra, or French car-sharing company BlaBlaCar, they will be in usually supported by external money. A 2022 report by Austria’s i5invest found that in 2021 there were 130 unicorns in Europe, including the UK – about a quarter of the total in the US – but nearly half the funding came from non-European venture capitalists, the majority of which were based in the United States.
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Unraveling Europe’s tangled patchwork of national interests will take years of investment and political will. But regulation would be a good start. Currently, central market oversight rests with EU member states, who also have significant influence on decision-making at the European Securities and Markets Authority, a 2011 Paris-based agency that mainly coordinates and does not regulate directly.
This chaotic situation contrasts with the EU’s successful move to common supervision for big banks in 2014, a move many see as protecting the Union from the fallout of the recent round of financial bankruptcies in the US.
Supporters of the status quo say ESMA’s relative youth, combined with its over-reliance on national regulators, means it does not provide world-class independent supervision. So far, countries have only ceded power marginally, for features such as credit ratings and trade registers. The important players such as broker dealers, asset managers, stock exchanges and clearing houses remain monitored across borders.
Yuriko Backes and Magdalena Rzeczkowska, finance ministers from Luxembourg and Poland, wrote in May that stronger joint oversight was “counterproductive” as it limited national expertise. Larger countries have similar reservations: Spanish Deputy Prime Minister Nadia Calviño said she was “very positive” about joint oversight — just not now.
“I don’t know if I would honestly say first of all that ESMA should be a regulator,” Calviño said in Brussels on June 7, though she called for broader and deeper capital markets that could attract private money.
It is true that supervision alone will not create a central marketplace, but it is difficult to imagine how the EU can move forward without it. Europe’s policymakers are talking a good game. Common market surveillance has been an official end goal since a 2015 report from the heads of the main EU institutions. A roadmap for 2020 also called for integrated oversight. But political obstacles stand in the way, ranging from long-standing rivalries between France and Germany to a broader distrust of Brussels in each country’s capitals.
If you want to persuade private investors to get involved, you have to give them leeway. In the area of sustainable investing, where the EU is a world leader, centralization has shown promise. The European Commission itself is on track to become the world’s largest issuer of green bonds, and on June 13 Brussels proposed that ESMA should oversee providers of environmental, social and governance (ESG) ratings .
Giving ESMA more powers over audit firms, cross-border market intermediaries and EU-based clearing houses would be a significant step in allowing the regulator to come of age. The next step would be a change in governance. Currently only national supervisors can be voting members of the ESMA Board. In the long run, it deserves a body of independently appointed voting members, similar to the European Central Bank’s single supervisory mechanism for banks.
Changes like these would start a virtuous cycle: if ESMA had more authority, it would attract better talent from EU member states. It would also help the EU put its money where its rhetoric is.
More than ever, the EU needs innovation to break away from fossil fuels and risky dependency on Chinese supply chains. Bringing capital markets together through better regulation and market incentives could keep the next generation of unicorns at home.
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CONTEXT NEWS
At summit meetings in March and June, the heads of state and government of the European Union called on the EU to improve the capital markets as part of its competitiveness.
On 13th June the European Commission proposed to give the European Securities and Markets Authority new powers to monitor providers of environmental, social and governance (ESG) ratings.
ESMA is an independent agency that sets regulatory standards, oversees specific areas of the market and coordinates national securities regulators. Operations started in 2011.
The Capital Markets Union is an EU project launched in 2014 as a long-term project to promote cross-border investments. An action plan for 2020 calls for a transition to integrated supervision.
Edited by Francesco Guerrera and Oliver Taslic
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