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After years of under-investment, the EU recognizes the enormous new capital resources needed to achieve a decarbonized, high-tech society capable of protecting its security and economic interests. This insight creates new impetus for a seamless capital market in the Union. But their leaders still fall short of the political ambitions Europe needs.
The “Capital Markets Union” agenda emerged from the Eurozone debt crisis, which exposed a lack of financial risk sharing between countries. A secondary goal was to increase the attractiveness of the euro worldwide through deeper investment pools.
However, little progress has been made. The loss of the region's largest financial center to Brexit hasn't helped. But the costs of Europe's fragmented and flat capital markets have only increased as the need for capital has increased: to redesign energy and transport systems, retool industry for a zero-carbon world, increase defense production capacity and enable innovation Start-ups can grow without having to cross the Atlantic for financing.
Governments cannot and should not provide the bulk of the trillions of dollars in additional investment required, and the EU's bank-heavy financial system cannot mobilize private, long-term venture capital at the scale required. However, private market capital continues to be restricted by a patchwork of national laws, regulatory and supervisory authorities, and trading venues. The result is perverse: untapped investment opportunities, inadequate rewards for savers and an economy that risks falling behind in a more competitive world.
Policymakers are finally recognizing the connection between Europe's productivity challenges and its fragmented capital markets. In an intensification of political engagement on an issue that has so far been largely the preserve of technocrats, the Eurogroup of finance ministers has agreed on a declaration promoting the Capital Markets Union for national leaders at a summit next week. This is followed by a similar statement from the European Central Bank. The upcoming reports commissioned by Mario Draghi and Enrico Letta on Europe's competitiveness and its internal market respectively should also highlight the urgency of the Capital Markets Union.
There is no mystery about what is needed. Investment and insolvency rules need to be unified or at least harmonized so that cross-border investments are no more difficult than within one country. Where multiple rules exist, companies should have the option to opt for EU-wide regulation and supervision.
Regulations must strive for simplicity for both investors, including retail investors, and companies. More powers need to be devolved to EU-wide bodies such as Esma, the bloc's financial markets regulator. Governments must encourage cross-border consolidation of marketplaces, financial providers and investment products.
The EU technocrats know this. Politicians continue to be in conflict with the self-interests of domestic constituencies. But the Eurogroup's preliminary commitments point in the right direction: they accept “convergence” in rules and call for national measures to boost capital market investment, such as ending fairness bias in their tax systems. You now have to go further and faster on this path.
The challenge is more political than technical. The responsibility for the success of the Capital Markets Union lies with national decision-makers. They should go beyond simply endorsing the Eurogroup statement next week. Calls for greater speed and ambition, as well as quicker follow-up, would keep pressure on finance ministers to take bolder steps.
Leaders must also take responsibility for the project, which requires as much political commitment as the creation of the single market in the 1980s. Only politicians can convince citizens that their security and prosperity depend on Europeans everywhere investing their savings in businesses across Europe. The shaking must end.
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