The debate on the Capital Markets Union (CMU) has never been as vociferous as it is now. Even now, the measures on the table are not enough to bring about fundamental change. With the Franco-German engine weakened after the elections, there is a serious risk that EU governments will fail to adopt any substantial reforms or will simply agree on measures that de facto reinforce existing market fragmentation and endanger financial stability. Against this backdrop, the new Commission should take EU leaders at their word and champion an ambitious CMU agenda for structural reforms that create a genuine single market for capital. Only transformational changes to Europe’s financing landscape will allow the EU to benefit from growth opportunities and safeguard its financial and technological independence from the US and China.

Europe would benefit from deeper and more integrated capital markets. The European financing landscape is centred around banks. Only a handful of EU member states have well-developed capital markets and, with the exception of bond issues, these markets are fragmented. The absence of integrated capital markets increases capital costs for listed companies unnecessarily and deprives the European public of profitable investment opportunities. The lack of risk capital also limits the prospects for innovative firms in green and other technology sectors, reducing productivity growth and maybe even slowing down the transformation of the European economy. As long as the financial sector is unable to channel Europe‘s savings into new high-tech start-ups, biotech, nanotech, and other innovative firms will search for growth capital in other jurisdictions and Europe will continue to import technology.

The incoming European Commission should build on the current momentum and not shy away from proposing structural changes. EU leaders in April stressed the urgent need to create truly integrated European capital markets and in June reiterated the importance of the CMU in mobilising the necessary private investments to meet future challenges. The leaders of France and Germany have been leading this new push, but their focus, in particular in France, has now turned to domestic policies. There is thus a great danger that the discussion at EU level will either fizzle out or focus on measures that risk financial instability or reinforce current market fragmentation. The measures that the Eurogroup has  put on the table so far are insufficient to advance cross-border capital markets significantly. Tweaks to existing financial market regulation such as the review of the Securitisation Regulation will at best deepen national markets but fail to integrate them. For true progress, addressing the big roadblocks will be key. To allow for transformational policies, Europe must overcome the fragmentation of national insolvency and tax laws and work on a truly Single Rulebook for financial firms. For this to happen, the incoming European Commission should take the EU leaders at their word and champion an ambitious CMU agenda. Europe’s financing landscape requires structural changes. 

1 State of play 

Creating the CMU is a must. The initiative of creating a union of capital markets was initially proposed by President Juncker’s Commission in 2014 and can be linked back as far as the Treaty of Rome in 1957 and the objective of free movement of capital. The idea behind the CMU is to deepen and integrate national capital markets in Europe to form a single, large and well-diversified capital market. This should offer companies - regardless of where they are based in Europe - the opportunity to obtain money from the capital market in addition to bank financing. Institutional and retail investors should be able to invest their money cheaply and securely across national borders. An integrated financial market should also attract foreign investors. By exchanging capital across borders, investment risks would be widely spread, which should stabilise the financial system. To this end, the major capital market players should be subject to standardised rules and supervision. A strong European capital market ultimately also includes the creation of a European safe asset that offers investors a liquid, risk-free reserve and provides a reference for other financial market products so that their pricing is decoupled from national sovereign bonds....

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