10 September 2019

IMF - A Capital Market Union for Europe: Why it’s needed and how to get there

The authors claim that larger intra-EU portfolio flows would help move the EU toward realizing its full economic potential. The relatively technical steps that are recommended for removing identified barriers to such flows should be feasible without high-level political deliberations.

European finance is still sharply segmented along national lines, with savers and investors depending heavily on national banking systems. Although the landscape is dotted with many different types of investors and intermediaries, their focus is mostly domestic—“home bias” is pervasive.

This is a problem because it results in an uneven playing field: the financing costs companies pay depend hugely on their country of incorporation, collateral-constrained startups find it hard to get any funding at all, and consumption is not shielded from local economic shocks.

The authors urge European policymakers to consider three targeted sets of initiatives in pursuit of greater capital market integration.

To improve transparency and disclosure, we propose introducing centralized, standardized, and compulsory electronic reporting for all issuers of bonds and equities, irrespective of size, on an ongoing basis. This would be a major change to the European reporting framework. And digital technologies can be used to streamline cross-border withholding tax procedures.

To contain systemic risk and improve investor protection where it lags, we propose a series of actions to sharpen regulatory quality, guided by a principle of proportionality. First, systemic entities such as central clearinghouses and large investment firms should be brought under centralized oversight. Second, the European Securities and Markets Authority can and should be strengthened by introducing independent board members. Third, the new pan-European pension product could be pepped-up with design changes to enhance portability and cost-efficiency. Fourth, recognizing the global nature of capital markets, the EU should aim for maximum regulatory cooperation with non-EU countries.

To upgrade insolvency regimes, the European Commission should, first, carefully collect data in an area where the existing information is unreliable; second, develop a code of good standards for corporate insolvency and debt enforcement processes; and, third, systematically follow up on EU member states’ progress toward observing such standards.

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