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24 March 2015

The Parliament Magazine: Capital markets union is about 'better exploiting the EU single market'

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The capital markets union could help SMEs access better funding, but pre-existing tools within the internal market should not be ignored, writes Peter Simon.

The term 'capital markets union' (CMU) inevitably recalls the banking union, which was created as a direct response to the financial crisis that was not least triggered by banks that often took excessive risks unimpeded.

The capital markets union, however, is a proactive initiative to help solve the complex problem of the sluggish economic growth that has plagued Europe for many years now, in particular by improving the financing conditions of small and medium sized enterprises (SMEs).

There were several different options to choose from, and the commission introduced a number of proposals in its green paper. The trick was to select those that would bring the most value to Europe's economy.

The CMU's great potential lies in better exploiting the EU single market in terms of financing companies. For example, what has already long been implemented in the field of goods also applies - in principle - to capital and the capital market financing of companies. On the basis of harmonised European rules, the offer of private capital available across the continent can be better matched with demand from companies.

It is particularly difficult for SMEs and start-ups based in member states most affected by the crisis to find tailor-made financing. Development banks are now being set up in many countries, as banks are less and less inclined to grant loans.

Yet even in member states that have a well-developed and proven credit supply for businesses, improved access to capital market financing could help solve specific problems and effectively complement existing services.

For instance, companies with specialist business ideas or unusual growth patterns often struggle to get suitable financing. Problems can also occur when companies enter a new stage of growth and their bank's offering is no longer adequate, and the financing does not consequently follow the firm's growth.

The European commission is currently carrying out a public consultation to find new ways to reduce bureaucracy, especially in the area of prospectuses. Among other things, a prospectus describes a financial instrument's risk profile, but its creation can be burdensome. 

If SMEs are to be encouraged to further consider the potential of capital markets, any administrative hurdles that do not affect the validity of the prospectus should be removed.

In addition to initiatives aimed at improving conditions for SMEs, the commission should materialise the plans featured in its green paper, so as to increase investment in key infrastructure projects in a timely manner. 

The rapid and successful implementation of the expansion of broadband and energy networks, for example, is a prerequisite to ensuring that our economy remains forward-looking and competitive. 

This where the European fund for strategic investments comes into play, as it cushions risks for major projects that would otherwise be difficult to assess through an investment guarantee. 

This is somewhat supported by the recently adopted European long-term investment funds (ELTIF), which are offered across the EU and are available to all investors, whether institutional, small or private.

These examples of the organisation of a CMU are not exhaustive. However, it seems clear that with the capital markets union, team Juncker has set itself the target of supplementing existing services. 

The published green paper proves that new legislation will come into question, for example if the exchange of best practices that have proven themselves in different member states, or voluntary initiatives from the market itself, do not represent viable alternatives. If the commission is successful, the tried and tested will not be supplanted, but usefully supplemented.

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