11 July 2014

Power to the European people: `Capital Market Union’

`Capital Market Union’ is a handy catchphrase, but can it develop into a major contribution to the deepening of European monetary union? Banking Union is on the statute books and we are sailing toward full implementation. However, few observers recognise the massive pooling of sovereignty implicit in banking union. What if there were an offset? Arguably, there is: a properly-designed capital market union would deepen the single market in finance but simultaneously buffer some of that sovereignty loss. It would be an open union that enables the savers of Europe to make their own choice about where they put their money – and de-centralise both financial and political power.

Why does Banking Union pool sovereignty?

The entire Eurozone banking system is now subject to the single supervisory mechanism (SSM) operated by the ECB. It will apply very detailed regulations drawn up by the European Banking Authority. These derive their legitimacy from legislation of the European Council and Parliament.  When the process is fully operational, “Europe” will have rules that should ensure the nearly-absolute safety of customer euro deposits equal to about 150 per cent of Eurozone GDP. These deposits are part of the support for banking assets that are closer to 300 per cent of GDP. But 85 per cent of these assets are under the managerial control of the 130 `SSM’ banks – and 5 groups control around 45 per cent of them. That is a massive concentration of financial power and any major failure of these European rules will surely have grave consequences for European citizens. By any definition, that is a major centralisation of the political sovereignty used to protect those citizens.

Why is `capital market union’ intrinsically different?

A well-designed capital market union should have exactly the opposite economic effect. The citizen-savers will decide the nature of the securities they wish to hold. Those securities may be issued via, traded by, and held in custody by, the same banking groups. But, if the citizens do not like the investment results achieved by their asset managers, they can move their assets to a different instrument, level of risk and location. In effect, this would be a rolling referendum by the most informed members of society. €7tn of assets (50 per cent of EU GDP) are invested in more than 35,000 UCITS funds alone.

To read the full 2000 word article, click through to the PDF link below

© Graham Bishop