The Capital Markets Union will only ever be able to complement the role of banks in Europe and Brussels should stop trying to enforce uniform rules on diverse financial institutions, writes Morten Messerschmidt.
Morten Messerschmidt is a MEP for the Danish People’s Party.
The European Commission recently released ideas for yet another union. This time it is called a Capital Markets Union (CMU). A real new EU policy star which along with the €315 billion Investment Plan and the ECB’s €1.100bn asset purchase scheme is supposed to finally deliver the sustainable investments in growth and jobs, that Europe is still starving for after the crisis.
But while the ECB purchase scheme does seem to be providing some powerful short term stimulus to Europe’s staggering economy it is rather difficult to put much faith in the other two.
First of all, it is important to be clear, that the main economic problem in Europe, is not a lack of capital. There is plenty of capital, which has recently mostly been injected into global equity markets. The fundamental problem is a continued lack of trust. A lack of trust in the abilities of the euro countries to solve the continued structural problems of the common currency.
Having said this, it could certainly be helpful to strengthen and develop Europe’s alternative capital markets, as indicated in the Commission’s Green Paper on the Capital Markets Union. Better designed more efficient rules on the internal market for capital could be beneficial in terms of unlocking investment for Europe’s small and middle sized companies – and possibly also attract new investment into the EU, as the Commission writes in the Green Paper.
But it is extremely important, that the EU gets it right this time. In this regard, most of the concrete initiatives we have seen so far from the new Commission have been somewhat discouraging. Take as an example the big Investment Plan.
Besides trying to grab funds which have already been allocated to European research and infrastructure, it has so far been impossible for anyone to prove the added value of luring member states to funnel their taxpayers money for public investments through Brussels.
The investment plan appears even less credible, when it aims to support projects that most likely would be seen as illegal for member states to pursue according to state aid rules.
So, let us hope, that the Commission will get it right when it comes to the CMU.
First of all, it is important to avoid a wave of new ideas and initiatives, that risks creating yet new layers of unnecessary red tape and add heavy compliance costs on Europe’s financial institutions. That would work in contradiction to the objectives of growth behind the strategy.
Rather than trying to reinvent the wheel the upcoming initiatives should furthermore acknowledge that financing for businesses in Europe is based on well-developed, historically established and often national structures, which have proven successful and crisis resilient.
In this regard it is also important the bear in mind that the CMU will ever only be able to complement the continued central role of banks in Europe. And here it was encouraging when the EU’s Finance Commissioner Jonathan Hill recently announced a reality check into the overall impact on jobs and growth of the last five years of financial regulation.
Bank strutural reform
Lord Hill’s review should take a strong look at the Commission’s proposal for bank structural reform. This is an unnecessary proposal which will only add an extra layer of costly financial regulation on top of the heavy regulations already put in place after the crisis.
The bank structural reform is also a really good example of a continued misconceived belief in the strength of harmonisation and one-size-fits-all, which still rules in Brussels.
In Denmark, experts and politicians have considered structural reform closely. Based on clear conclusions, like that the universality of big banks was a strength and not a weakness during the crisis, they have decided not to further interfere with the organisation of banks.
So please Brussels. Let Denmark stick to its convictions, and let global investors have the freedom to decide if they want to put their trust in the Danish model, or in one of the other national financial set-ups that a truly diversified European financial market could offer.
Another example of the misconceived belief in harmonisation rather than diversity is the treatment of Denmark’s special mortgage bond system. This is a system, which has proven its strength through 200 years of European wars and other economic disasters. It is a system which has been internationally recognised both for its benefits to consumers and as a crucial source of credit creation for small and middle sized businesses in Denmark.
Still, the system has been under heavy attack by the constant attempts to create still more uniform EU financial rules after the crisis. One of the negative effects of this treatment is, that a Danish Mortgage bond is today actually given a slightly less value even than a Greek state bond, when banks have to live up to the new liquidity requirements in EU capitals directive.
Examples like these should really make EU policymakers pause, and start to consider the true strength of financial diversity rather than uniformity in Europe.
In the further work on the CMU, diversity should be seen as a benefit. Not only when it comes to the variety of products on offer for global investors in the global financial super markets. But also when it comes to securing a crucial safeguard against future global financial earthquakes, where we all know that global investors have a tendency to run dangerously like lemmings in the same direction and unfortunately often over a cliff.
Such negative tendencies will only be reinforced the more the EU blindly unifies and harmonises our rules and thereby also our European financial institutions and systems. It is time instead to start celebrating diversity and acknowledge how free competition between diverse national fiscal and financial systems and business models have always been an important driver of stability as well as innovation in the history of European finance.