Through Paul PortugalManaging Director of Advocacy, Association for Financial Markets in Europe (AFME)
EEurope’s economy is on a different unpredictable course. The outbreak and resurgence of the COVID-19 pandemic over the past two years, and now the economic impact of the war in Ukraine, underscore why the European Union (EU) needs a resilient and diversified financial system that can withstand sudden economic shocks. Meanwhile, the financing needs associated with the green and digital transitions remain as urgent as ever: Europe’s financial system must be geared to channeling the significant volume of investment needed to make these transitions possible.
Capital market financing will play a key role in overcoming these challenges. However, the EU’s capital markets remain fragmented and undersized. Deepening integration and expanding the international reach of EU capital markets are therefore of paramount importance for Europe’s economic prospects and overall strategic goals.
The European capital markets and regulatory framework are evolving in the post-Brexit environment. Key legislative proposals that could have far-reaching implications for the European banking sector, the capital markets ecosystem and the promotion of sustainable finance are currently under review.
In the face of such changes, the EU must aim for regulatory outcomes that not only safeguard and strengthen financial stability and investor protection, but most importantly encourage greater participation by local and international actors in EU capital markets. A strong focus on this principle will be essential to further develop the EU’s capacity in primary and secondary capital markets.
Increasing market competitiveness will be crucial to Europe’s economic strength
Financial markets in the EU – or any other jurisdiction – do not function in isolation. They are interconnected and financial centers around the world compete with each other. This is particularly true in wholesale markets, where sophisticated investors and market participants operate in multiple jurisdictions themselves and must make decisions regarding the deployment of their capital and access to liquidity pools.
For this reason, politics should, if possible, contribute to strengthening the attractiveness and competitiveness of the EU capital markets. This, in turn, will support current efforts to develop the Union’s market ecosystem, promote the international use of the euro and achieve greater strategic autonomy in financial services.
To advance this goal, EU authorities could consider embedding the promotion of competitive and efficient EU financial markets in the mandates of the European Securities and Markets Authority (ESMA) and other authorities, alongside their existing core mandates. The importance of competitiveness can be seen in a number of areas. For example, an efficient and competitive securities trading ecosystem leads to better outcomes for end-users and is important to attract global market participants and support the growth of EU financial centres.
Promote international cooperation and regulation to support market development
The large successful global financial centers are characterized by their high regulatory standards, the quality of their legal frameworks, their openness to global capital pools and the size of their underlying financial ecosystems.
Maintaining openness and connectivity with non-EU markets is key to further building the EU’s capital market capacity. The EU should remain committed to open capital markets that allow EU participants access to international capital pools and funding opportunities while ensuring market integrity and fair treatment of EU and non-EU companies.
In addition, greater importance must be attached to supporting global regulatory cooperation, particularly in the areas of digitization and sustainability, as jurisdictions grapple with common goals and challenges. It is in the interests of European companies and investors to have consistent standards globally while maintaining the EU’s strong and ambitious leadership in these areas.
Strengthening of the European primary and secondary markets
The EU is at a critical juncture in its decisions about the future of its capital markets. Over the next two years, important policy debates will be advanced and concluded in areas such as market structure, prudential requirements for banks, sustainable finance and digitalisation, which will have the potential for significant change.
For example, as the EU competes with other global markets to attract company listings, attractive and harmonized listing rules on European public markets will be crucial to support crucial access to market finance for EU companies. The EU is therefore conducting a comprehensive review of company listing rules to encourage more companies, particularly small and medium-sized enterprises (SMEs), to list on EU public markets. This should ensure that a high degree of legal certainty, transparency and investor protection is maintained.
Meanwhile, lawmakers are debating a number of important, potentially transformative proposals for Europe’s secondary markets in the ongoing review of the Markets in Financial Instruments Regulation (MiFIR), which governs how markets operate. This work is crucial to promoting globally competitive capital markets in the EU.
An attractive, well-regulated trading ecosystem can foster innovative, world-leading market infrastructures and encourage enlarged liquidity pools within the EU. Promoting market efficiency, competition between service providers and compelling outcomes for investors and corporate and SME issuers should be at the forefront of the debate around these proposals for European market structure.
In this respect, proposals to set up a consolidated tape – similar to a price comparison tool for investors – should be supported. A well designed band will promote more attractive and competitive capital markets and reduce home country bias (where an investor tends to favor companies or investments from his own country) in the Union.
As these debates progress, it is important to consider the broader international context – including, for example, the parallel review of the UK wholesale market architecture. If the EU revisits its own market legislation and shifts a market structure towards one that ultimately becomes less supportive of investor choice and prevents investors from taking advantage of the most optimal trading conditions, it will not only result in additional costs for retirees and savers, but It there is also a risk that global market players will be discouraged from participating in EU capital markets, thereby undermining their competitiveness vis-à-vis other jurisdictions.
Now it’s time to complete the CMU
In summary, EU capital markets have many strengths that enable them to thrive in today’s global environment – including the size of the EU single market, the euro as the leading international currency and global leadership in ESG finance ( Environment, Social Affairs and Corporate Governance). .
In the recent Versailles Declaration, EU leaders agreed to create an environment that facilitates and attracts private investment by “creating integrated, more attractive and competitive European financial markets, enabling innovation to be financed and safeguarding financial stability by deepening the Capital Markets Union (CMU) and completing the Banking Union.”
These goals are achievable and within reach, but the EU needs to find the political impetus to implement measures that promote a globally competitive Capital Markets Union that can support sustainable long-term growth in the years to come.
ABOUT THE AUTHOR
Paul Portugal is Managing Director of Public Policy and Advocacy at the Association for Financial Markets in Europe. His main focus is on market analysis and regulatory developments across Europe in securities markets and banking sectors. Pablo is also a board member of the European Capital Markets Institute.
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