Experts urge for structural reforming to deliver on a full-fledged CMU

In her political guidelines speech before the European Parliament on July 18th, Ursula von der Leyen referred to the completion of the Capital Markets Union (CMU). She nourished the lively debate that has made the EU ministers’ minds spin in the last months of the mandate. Some weeks before, in its report “Much more than a market,” Enrico Letta called EU co-legislators into question to make them turn good wishes into political action.

With more investment needed in farming, industry, digital, and strategic technologies, von der Leyen vowed that the next mandate “will be the time of investment.”

She stated that the main issue concerns the “300 billion euros in savings channeling every year into foreign markets because our capital market is too fragmented” while persuading the Parliament to greenlight her for a second mandate. This money is often used to buy innovative European companies from abroad,” she remarked while proposing a European Savings and Investments Union.

European start-ups and scale-ups often need more access to risk capital at the national level. Their insufficient reputation and lack of credit rating history frequently clash with the requirements for getting a bank loan. Unlike in the US, European institutional investors rarely put their money into venture capital funds, which could then pass the money on to the youthful companies. Her address to the Parliament von der Leyen also emphasizes the need for a competition policy that supports companies in scaling up. Nevertheless, fragmentation in the capital markets union is the main head-scratcher since it unnecessarily increases capital costs for listed companies and limits the European public in investment opportunities.

The need for an ambitious political agenda

Since it was launched by President Juncker’s Commission in 2014, the idea behind the CMU has found meaning in offering companies opportunities to obtain money from the capital market and bank financing, making it cheaper, easier, and safer. As more favorable to cross-border capital exchange, the financial system would be based on more widely spread investment risks. The way things are, private investors usually invest within their own country, and institutional investors prefer extra-EU markets, where the returns are higher.

Despite the meaningful achievement in reducing bureaucracy and boosting transparency through several pieces of legislation and delivering on the adopted action plans, the EU is now facing the test of structural reforms, as the Jaques Delors Centre’s Sebastian Mack and Johannes Lindner stated in a report on the state of play and possible ways forward on the CMU.

Along with many other experts, Mack and Lindner call for more political ambition on three concrete proposals: a revived securitization market, enhanced participation of retail investors, and a significant centralization of capital market supervision.

Regarding the first point, they deter EU ministers from “flirting with relaxing capital requirements for securitizations held by banks or insurers” and instead boost the harmonization and standardization of mortgage contracts and insolvency law. “The EU introduced a special category of simple, transparent and standardized (STS) securitization products, but the STS label did not create a product as standardized as US Agency mortgage-backed securities,” they claim.

To increase retail investors’ participation, they suggest creating a European savings product for private pension provision. The proposal embodies the two-fold objective to “address the pension time bomb created by an aging population.” The lack of will to navigate this solution can be alternatively faced by letting Member States discretionally develop their own products according to common features agreed upon at the EU level. This proposal aims to fight the higher profitability that US companies showed.
The standardization of rules is also a prerequisite for efficient joint-supervision.

More powerful European Securities and Markets Authorities monitoring major capital market players would improve fraud detection at the EU level and contribute to financial stability. However, national governments prefer to keep financial supervision within their remit. A group of smaller countries, led by Ireland and Luxembourg, mistrust a deeper integration in this field and reject the harmonization in tax policies.

Riding the wave for a new momentum

The French and German governments have recently advocated for progress on the CMU. However, France, especially, is now preoccupied with domestic politics.  

“Harmonization of legal and tax policies will be needed as well as greater strides towards a truly single rule book and a review of some national social policy choices such as the design of member state’s pension systems,” Mack and Lindner stated. The development of capital markets cannot be separated by their integration across borders.

A vital premise of the CMU idea is the assumption that further integration will bring further development. Still, if measures to deepen national capital markets alone are adopted, Europe would miss out on a fair amount of additional efficiency gains that come only with integration. What’s more, neglecting integrationist measures is likely to strengthen the dominance of specific countries and market players, the two experts further claim. This could even lead to an unhelpful form of regulatory competition and supervisory capture. Actions by individual countries such as France and Germany may, in fact, exacerbate the existing fragmentation of European capital markets if unaccompanied by measures that advance integration. 

In 2021, the European Commission concluded a consultation that paved the way for the revision of securitization regulation. According to Mack and Lindner’s report, the recently proposed new rules on the treatment of withholding taxes will bring some relief. Still, they will only solve some issues hindering cross-border investment. A political agreement is expected to unblock the standstill in adopting a proposal on specific aspects of insolvency law. In terms of supervision aspects, further step are expected after a new consultation.