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Less than six months are left before the European Commission’s deadline to create a capital markets union across the EU, but the project is far from complete. EU companies still rely on banks for most of their financing needs. Many laws must be harmonised before the CMU can be fully effective. The French, German and Dutch finance ministers have called for an expert working group on CMU, with interim findings due in July. Their intervention is a welcome step to inject some vigour into the flagship project. Closer integration of Europe’s fragmented equity and debt markets would diversify funding sources for business and better channel investment across the continent. Cross-border investment would also improve risk-sharing across countries and reduce the companies’ dependency on home-country financing. Less fragmentation should also help to equalise the cost of credit for companies. Today, a company in one country can pay more than twice as much for credit as a comparable company in another, even within the eurozone. A reduced reliance on banks should improve macro stability during any renewed economic downturn while avoiding the political difficulties of agreeing an EU budget.
Since the CMU project was launched more than three years ago most of the European Commission’s 13 legislative proposals have now been agreed. Legislation covering prospectus regulation, improved transparency in loan securitisation and access to venture capital funding have all been passed. The remainder of the agreed points should follow shortly. But without harmonised laws on insolvency and securities ownership the CMU project as it stands excludes essential components required to achieve the aim of a true EU single market for capital. Brexit has also changed the landscape for CMU. Without the UK’s liquid capital market acting as a hub for EU financing, and with a hard Brexit becoming more likely, the need for deeper and more diversified funding sources across the EU is more urgent.
Finance ministers from eight EU countries pushed for a renewed effort last summer when few of the legislative proposals had been agreed. The latest call reaches much further — the resulting recommendations are intended to create the framework for the next European Commission. For it to be a success, other EU countries need to get behind the call for an expert working group. France, Germany and the Netherlands could also lead by example — by taking steps to harmonise their own key laws.
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