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The European commission presented its green paper 'building a capital markets union' which began with the words: "The commission's priority – Europe's priority - is jobs and growth". This is a positive stance. Given the shocking levels of unemployment and the difficulties confronting small and medium sized enterprises in financing themselves in some member states, it is clear that the EU must deliver quickly. There is no time to waste, as the introductory statement highlights.
As such, it is necessary to quickly go beyond the green paper, which triggers a consultation phase but does not provide clear answers. Much work has previously been undertaken on the topic: the financial services action plan of 1999, the Giovannini report (2001), and the De Larosière report (2009). The timeline for a fully functioning capital markets union (CMU) by 2019 contradicts the urgency that the commission has attached to the proposal. The question of timing is all the more crucial as the challenge is a major one.
A comparison with the US may help to better understand capital markets and therefore help us to incorporate the most positive dimensions into Europe's CMU. There is definitely untapped potential in the EU for non-traditional bank loans, such as venture capital or crowd funding for example, but it is not banking intermediation (the use of funds taken in on deposit being used for lending) that was the main cause of the financial crisis.
It is also important to consider whether we in Europe want to fully go down the path of rebalancing the 'banks versus markets' funding channel to the US model, where there is an approximately 70 per cent markets to 30 per cent banking ratio.
A change to the channels is desirable but cannot take place in a short period of time. To build efficient and appropriate financing mechanisms through capital markets, one needs to build a whole new 'ecosystem', which takes time.
Let us not overlook the fact that the US has experienced some weaknesses in this area and is still in the process of correcting them, through lengthy processes in the congress and federal agencies. We have to take into consideration the time it took the US to establish lively capital markets.
One fundamental element to take into account is the cultural dimension. The American way of financing the economy cannot be copy and pasted into Europe's financial sector. Neither citizens nor SMEs are ready to spontaneously 'go to the markets' to yield a profit from their earnings or to match their financing needs.
More tricky elements also come to mind which may prove to be obstacles. In some member states you don't have major players such as pension funds, households do not directly acquire securities, there are diverse national taxation systems, European legislation, for example solvency II may render investment more difficult and the bottlenecks of the single market deter investors.
The added value of a CMU for Europe is it would allow an optimal match of financing needs with financing capacity and avoid fragmentation in the 28 member states and, to an even greater extent, in the eurozone. A successful European CMU will require above all a level playing field.