The European Commission expressed commitment to stronger and more deeply integrated financial markets with its action plan on capital markets union (CMU) published one year ago. This objective cannot be achieved without a strong commitment from the EU Member States, even more crucial now, as Europe recovers from the COVID-19 crisis.
Pauline Guérin is Financial Markets Senior Policy Adviser at European Banking Federation (EBF).
According to the International Monetary Fund, almost 20% of Small and Medium Enterprises (SMEs) could have gone bankrupt because of COVID19, that is to say, a quasi-doubling of business failures than on average. This doubling of bankruptcies would have put at risk 3.1 % of private sector jobs.
The CMU is the EU’s plan to create a single market for capital across 27 Member States. It aims to provide new sources of funding opportunities for business, increase investment options for savers, and make the economy more resilient. It also aims to get investments and savings flowing across the EU to benefit citizens, investors and companies, regardless of where they are located. By doing so, it will help the EU economy recover from the crisis, resume growth and channel money towards the green and digital transition.
The publication of the European Commission’s Action Plan in September 2020 in the midst of a health and economic crisis shows its strong commitment to CMU. However, as advocated by the Markets4Europe, the EU Member States must embark on this journey as well. If countries limit themselves only to national interests and treat their own legal system as barriers, Europe cannot deliver on its ambitious plan and overcome the economic crisis brought about by COVID-19.
National governments should keep in mind that the EU businesses are weakened by limited sources of funding. Corporates and SMEs in the EU mostly rely on bank financing, and the situation is not improving. Most sectors of the capital markets in the EU have shrunk relative to the size of the economy over the past decade, and the gap in the depth of capital markets with the US has widened. We can only agree with Valdis Dombrovskis, Executive Vice-President of the EU, that the coronavirus crisis has injected real urgency into our work to create a Capital Markets Union.
But a year after the EC’ publication of its action plan, we need a strong commitment from the Member States to embark on a difficult but necessary journey as this was the missing piece under the first European CMU action plan (2015-2019).
Much remains to be done to establish a deep and efficient single market for capital. The remaining barriers are conditioned by history, customs, culture and are deep-rooted. They exist in many areas, including supervision, taxation and insolvency law. This will take time, determination and political support to tackle them. This is why we need our national decision-makers to take a long-term view, not to stick to old positions and national specificities but to embrace the EU project and to take ambitious reform on specific topics which create obstacles to cross border investments.
Firstly, Member States need to take a more flexible approach regarding tax reforms and need to agree on a streamlined procedure to collect tax over cross border investment. Secondly, Member States have to harmonise insolvency law to make the outcome of insolvency procedures more predictable for investors. Thirdly, Member States need to take a common approach to financial education. The EU economy needs well-informed and well-educated retail investors, able to make appropriate investment decisions.
However, one may consider that national discrepancies are too high and that the UK is a too strong competitor in this sector to allow the EU to assert its position. Brexit threatens to move some of the key market infrastructures outside the EU, increasing the risk of dependence of the EU’s economy on non-EU capital markets. It will lead to greater fragmentation in the EU, loss of liquidity and an increase in costs for end-users. This is the reason why we need to act now to build a credible competitor to the City of London and to be able to offer funding solutions to our SMEs.
Now is the time to act. COVID-19 recovery is the opportunity for the EU 27 Member States to contribute to the EC CMU action plan and to take the necessary reforms at the national and at European level to build integrated and efficient financial markets for the benefit of businesses and citizens. The European Union will grow stronger economically and politically from such support.