Last week, European officials proposed uniting their capital markets to make it easier for businesses and individuals to invest and borrow money across the 28 countries that make up the union, something that has been made difficult by differing national laws and regulations. The European Commission, the executive branch of the E.U., outlined strong goals that would, for example, make it simpler for German savers to invest in mutual funds that own stocks across Europe or for Italian corporations to sell bonds to French insurance companies. But European officials have not yet outlined a detailed plan to achieve this.
A well-regulated capital markets union would take years to create but could provide a boost to the struggling European economy by reducing the cost of borrowing money, especially for small and medium-size businesses, and providing savers with greater investment opportunities. Combining Europe’s stock and bond markets would also reduce the reliance on banks, many of which have not yet recovered from bad investments and loans made before the financial crisis.
To realize these benefits and to protect against another crisis, European officials should create new regulatory agencies, or use existing ones, to issue and enforce strong financial rules in coordination with national agencies. They will have to guard against efforts by special interests to use the creation of a capital markets union to roll back sensible European and national regulations that were put in place in response to the global financial crisis. They should also create a common approach to resolving defaults and bankruptcies, so borrowers and lenders have confidence that they will be treated the same regardless of where they are based.
Some politicians will not be willing to hand over more control to centralized European agencies, given increasing skepticism about the E.U. among voters in many countries. This is especially true in Britain, where the U.K. Independence Party has won elections by arguing that the country should leave the European Union. Partly in response to this movement, Prime Minister David Cameron has promised to hold a referendum by the end of 2017 to let voters decide whether Britain should stay in the E.U.
Britain’s posture toward a capital markets union will be important, because London is Europe’s biggest financial hub. A serious blow could be dealt to the prospect of a union if a coalition that includes parties hostile to the E.U. comes to power after Britain’s parliamentary election in May.
In recent years, European leaders have done too little to make the union stronger. The misguided demands by officials in Germany and on the European Commission for austerity in Greece, Spain, Ireland and other economically troubled eurozone countries has contributed to high unemployment in those nations. It is little wonder that many Europeans are losing faith in the E.U.
Creating a capital markets union, a technocratic exercise that requires changing financial laws and regulations, could have substantial economic benefits. Just as important it would reaffirm the importance of the European project.
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