18 September 2024

SUERF: The Next European Commission's Policy Choices: A Credit Perspective (Part 3): Capital Markets Union (CMU) and Banking Union (BU)

by Broyer, Charnay: we see renewed political impetus to drive the CMU forward – in the direction of developing a pan-European capital markets infrastructure, improving access to finance to enable companies to innovate, and broadening investment opportunities for EU citizens.

S&P Global Ratings expects the next European Commission to continue to prioritize EU competitiveness and the digital and green transition, as well as defense, security and immigration issues. In this series of Policy Notes, we take a closer look at the issues of:

• the enforcement of EU fiscal rules in a context of rising defense spending,
• Energy market integration,
• Capital market union, banking union and financial services regulation.

On the third point, the subject of this note, we see renewed political impetus to drive the CMU forward – in the direction of developing a pan-European capital markets infrastructure, improving access to finance to enable companies to innovate, and broadening investment opportunities for EU citizens. We do not see much political will to complete the banking union but expect some incremental changes to enhance regulatory and crisis management frameworks for banks. We believe that without material progress on the CMU and the BU, the European economy will not be empowered to tap all its ample financing resources and could continue to have low potential growth and little capacity to absorb asymmetric shocks without massive transfers of public money.

What are the prospects of advancing the CMU?

Accelerating the integration of European financial markets by advancing the CMU is likely to be one of the next European Commission’s agenda items.

The European Council’s Strategic Agenda is heading in this direction, and it echoes several reports that the EU has commissioned from former European officials such as former Italian prime minister Enrico Letta and former governor of the Bank of France Christian Noyer, as well as policy recommendations that the Eurogroup, the ECB Governing Council, and the European Securities and Markets Authority (ESMA) have issued recently. The next European Commission’s roadmap will borrow extensively from the Strategic Agenda and these policy recommendations.

Advancing the CMU may improve the EU’s strategic autonomy by promoting the international use of the euro and reducing the EU’s dependence on external sources of funding. It could also support the transition toward a green and digital economy, improve risk-sharing, and mitigate the spread of income shocks between EU countries. Finally, advancing the CMU could help boost the EU’s competitiveness, which is essential for Europe not only to keep pace with China and the U.S., but also return to its own long-term growth trajectory.

The European economy was well on its way out of the pandemic before the war in Ukraine derailed it. The European economy is now 2.5% below its historical productivity trend (see chart 1). Although the shortfall is largely due to high energy costs and labor hoarding, the rebound we expect over the next two years will probably only make up for half of it. So, without vigorous economic reforms, some of the current productivity losses could turn into permanent losses.

We see the fragmentation of Europe’s capital markets as an obstacle to Europe’s economic development. European capital markets are deemed too small, too national and therefore too illiquid, and too expensive for small investors and issuers. This translates into limited cross-border capital flows between EU members, lower private investment than savings alone could provide (see chart 2), and a flight of savings abroad....

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