A year ago, Jonathan Hill launched the European Commission’s Action Plan for a Capital Markets Union. Progress has been limited, and responsibility rests with the member states. Michael Collins asks if their appetite is strong enough for the reforms needed.
Michael Collins is chief executive of Invest Europe.
Speaking before the European Parliament as part of his nomination process in summer 2014, Commission President Jean-Claude Juncker announced an ambitious objective: to tackle once and for all the barriers and blockages that keep capital locked behind national borders.
These barriers prevent European companies from matching their US competitors’ access to more diverse, more stable and more resilient forms of funding, including private equity and venture capital.
After a year of extensive consultation and debate, last autumn the Commission launched its Action Plan – a sensible, pragmatic set of recommendations for concrete action that would make a difference. Piece-by-piece, it has been implementing them and a handful of these 33 actions have already made clear progress.
Its amendments to the Prospectus Regulation will make it easier for smaller businesses to raise finance via the public markets. Its revision of the EU Venture Capital Regulation (EuVECA), if agreed by the Parliament and Council, will make it more flexible and thus attractive to a wider range of investors in small businesses.
Already in place are reduced risk weightings for insurance companies looking to invest in infrastructure projects such as buildings, roads and power supplies. Similar adjustments are expected for investment in infrastructure corporates, the operating companies that ensure that passengers can speed through an airport or that consumers have reliable energy distribution networks.
While the Commission’s belief in Capital Markets Union is not in doubt, the commitment of the EU member states seems somewhat less certain. All of these initiatives will – in theory – help boost cross-border investment where it’s needed the most, but in practice it’s not always straightforward.
Take, for example, the Commission’s recent consultation on the barriers to operating cross-border investment funds of all types – another CMU initiative. Investors and fund managers can face all sorts of problems when they try to raise capital from an investor in one member state to be invested in a fund or a business in another.
At Invest Europe we see national competent authorities imposing unjustified fees and charges on firms wanting to invest into or from another member state. We see outright bans on venture capital or private equity firms from another EU country to market their fund, even if an identical domestic manager would be free to do so. And we see tax regimes that are so complex and so open to interpretation that they act in effect as a barrier to entry to foreign fund managers.
Some of these issues can be tackled at EU level. For example, the Commission is proposing to outlaw these unwarranted fees in their EuVECA revision. But many of these problems don’t need EU law solutions – just a serious commitment from national competent authorities and finance ministries to creating a systematic, fair and workable Capital Markets Union.
Invest Europe’s data shows that that out of the €47 billion total private equity and venture capital investments in Europe last year, €31 billion went to domestic start-ups and companies, while only a third of that – €13 billion – was invested cross-border within Europe. There is clearly more that can be done to get more investment capital moving between EU countries to fund the continent’s brightest young businesses, wherever they are located.
If the member states can commit to creating a true Capital Markets Union, we can unlock Europe’s capital and allow it to flow across borders. We can remove the pervasive home bias that starves investors – such as pension funds and insurers – of the opportunity to find the best returns, and that starves entrepreneurs of the funding they need to launch, grow and internationalise their businesses.
Investors and fund managers across Europe are keen to increase the role they play in supporting the European economy and the Commission is preparing the ground to make this happen – are the member states ready to allow it?