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How can we reap the potential benefits of CMU while remaining realistic about what is achievable? In this talk, I would like to stress three aspects that I consider important for the CMU project and where central banks can make concrete contributions:
1. Transparency in terms of data and relevant regulations: Over the past decade, the data infrastructure in Europe has improved significantly. Central banks, statistical agencies, and reporting entities have invested massively to improve our understanding of financial markets.
Yet regulatory and technical constraints hamper using these data smoothly across public institutions and making relevant data available for private market participants and researchers. Similarly, obtaining information on relevant national regulations at low cost is not always straightforward. Improving transparency and access to existing information can thus make relevant contributions to the CMU project.
2. Improved communication and financial literacy: A CMU project that is to bring benefits to individual consumers and households must be communicated and explained accordingly. Many terms that are used to describe the benefits of the project, such as “enhanced private sector risk sharing” or even the name “Capital Markets Union”, are reasonably clear for trained economists, but their concrete meaning is much harder for laymen and -women to grasp. A sufficient degree of financial literacy and consumer protection is needed for consumers and firms to actually grasp the benefits of integrated financial markets or of pan-European pension products. Hence, developing or strengthening national strategies to improve financial education can complement further steps towards the CMU.
3. Evaluate policies and identify relevant frictions: Since the launch of the CMU project, the Commission has initiated and implemented a number of concrete measures. It is certainly too early to tell whether these measures have been effective in reaching the objectives of the project. Hence, much remains to be done with regard to research and analytical work to follow up on the progress made so far, identify remaining frictions, and assess potential benefits of future policy changes. A good data infrastructure is a core element of such an evaluation agenda.
I have highlighted three aspects that can help advance projects under the umbrella of the Capital Markets Union.
First, improved transparency in terms of data and regulations can be beneficial for market participants, households, firms, and not least academic researchers. Many promising initiatives are currently underway in the Eurosystem and beyond, some of which require additional legislative changes to reap their full benefits. For example, the Legal Entity Identifier takes the pivotal technical role of connecting relevant information on markets, instruments and counterparties. The more nodes (or entities) that have a LEI, the clearer the picture of the economy can become. To foster this idea, an initiative at the EU level to make the LEI mandatory could be envisaged. However, an improved informational environment should not be confined to information on financial activities; greater transparency is also needed with regard to relevant regulations and institutional differences across countries.
Second, communication and financial literacy are key. The CMU project and its benefits need to be explained in a way that is accessible to non-experts and people who do not regularly deal with financial market issues. For Europe’s citizens to realise the potential gains from better and more integrated financial markets, a sufficient degree of financial literacy is required. Therefore, promoting national strategies towards improved financial literacy – to the extent these exist – or even starting such initiatives is a key complement to the CMU project.
Third, evaluating whether the policy measures taken in the context of CMU so far are sufficient to address identified frictions and what the likely effects of newly proposed policy measures might be requires a structured policy evaluation process. Policy evaluation is not an end in itself, but rather helps convince the public that policy measures taken serve the intended objectives – while minimising negative side effects. In the area of insolvency legislation, for example, the most promising way forward may be to focus on overcoming specific frictions by agreeing on certain minimum requirements that serve to selectively improve key aspects of insolvency regimes in order to make them more efficient, such as those that determine cost, speed and transparency. A good evaluation design can help identify the effects of such measures.