01 October 2015

Bruegel: Europe’s Capital Markets Union and the new single market challenge

[...]The plan includes more favourable frameworks for loan securitization and insurers’ investment in infrastructure projects; the start of consultations on the markets for venture capital and covered bonds and the cumulative impact of past EU regulatory decisions; and many more reviews and reports to be produced by the Commission in the years ahead.

There is much to be commended in this document. It strikes a sound rhetorical balance that has often escaped the European Commission in the past between, on the one hand, the need to develop financial services as indispensable fuel for the European economy, and on the other hand, the imperative to ensure proper financial sector regulation. [...]

Nevertheless, there is a great contrast between the high level of ambition signalled by the very language of Capital Markets Union – with its echoes of Banking Union, the distinct and radical initiative being rolled out in euro area countries since mid-2012 – and the incremental nature of the action plan, which mostly boils down to pruning existing rules and correcting some of the recent regulatory overreach. [...] Potentially the plan’s most significant initiative, a piece of EU legislation to harmonize insolvency law whose initial version will be published by the Commission in late 2016, is left undefined and could well end up being unimportant. Major obstacles to capital markets integration remain untouched, including divergent accounting enforcement regimes, fragmented market infrastructure, or incompatible frameworks for the taxation of financial investments. [...]

A more convincing explanation for the plan’s underwhelming content is the Commission’s self-imposed restraint on any change in the institutional architecture. [...]More importantly, it is highly debatable on grounds of substance: as practitioners know, having to deal with different regulators in different countries creates duplication, inconsistencies, and ultimately barriers to seamlessly integrated cross-border business.

The Commission may be motivated by a general caution about preserving the turf of Europe’s myriad national financial authorities (51 of them, only looking at membership of the three European Supervisory Authorities and not including non-EU participating members of the European Economic Area). But the EU has been able in the recent past to create central agencies with bite when needed: for example, the Banking Union’s supervisory arm hosted by the European Central Bank, known as the Single Supervisory Mechanism (SSM), and Single Resolution Board (SRB), a new agency in Brussels; [...]

[...] Commissioner Hill insists that its capital markets union should include the UK, and he is right on this: London is the undisputable hub of Europe’s capital markets, and an integration project that would leave it aside would entail much more serious risk of creating a harmful fault line inside the European Union than is the case with banking. [...]

In the short term, there is a solid case for the European Commission not to go against this effective UK veto over any meaningful change in the architecture of European financial regulatory institutions. The referendum creates a material risk of the United Kingdom leaving the European Union, which can reasonably be seen as severely detrimental for both. [...]By contrast, the City of London and other parts of the UK financial services industry are almost sure to gain from more development and integration of Europe’s capital markets, given their entrenched comparative advantage in financial intermediation – assuming that the UK remains in the EU. [...]

As it happens, regulated services are also increasingly important for Europe’s growth and also for its economic and social resilience. [...] While the “old” single market in goods and unregulated services was satisfactorily addressed through standards harmonization, the new single market challenge is all about regulatory enforcement institutions. Denial of this stark reality is widespread in Europe, not least in the UK itself. Such denial may be politically expedient but is analytically unhelpful, and stands ultimately at odds with the proclaimed commitment to a European single market. A clear-sighted public debate about this challenge may be delayed until after the UK referendum, but not indefinitely.

Full article in Bruegel

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