Karel Lanno (The Centre for European Policy Studies)
The call for a Capital Markets Union has been a useful means to raise awareness about the need for more integration in Europe’s capital markets. Despite years of harmonizing regulations and the existence of a single currency, these markets remain fragmented. Therefore, it will be difficult to define the Capital Markets Union, whereby a lot depends on the size of the ambitions and objectives pursued.
The first priority should be deepening and widening the scope of the Single Market. In light of many measures adopted during the latest financial crisis, which created a regulatory framework among different actors within the capital markets, the enforcement of the rules is a key objective. The inception of new initiatives and the filling of gaps in the regulatory framework could become a second priority, whereby this obviously depends on the necessity to overcome the fragmentation of the market. Other objectives could lead to the expansion of sources and the facilitation of the financing of capital markets for the purpose of gaining an easier access to funding for small and medium-sized enterprises (SMEs). As long as Europe remains fragmented, with many small and large financial centers, the whole structure must be tailored to suit these differences. The fragmentation could only be overcome if well-tailored investment programs are designed and implemented across the whole Union. High-quality standardized asset-backed commercial papers (ABCPs) and asset-backed securities (ABSs) or SME financing schemes should thus stimulate market integration.
Today’s European investment fund market, which is very fragmented, may be considered as one of the main factors that contribute to divergent development of capital markets within the Union. EU-wide retail investment products could hopefully be an important contribution to market integration while generating savings in the economy. Moreover, the re-development of securitization in the EU as a way to package small or illiquid financial instruments into bigger and more tradable products could be an useful means for opening the markets. High on the agenda is also further harmonization of accounting standards. The current international financial reporting standards (IFRS) only apply to listed corporations. The majority of the enterprises in the EU report using local GAAP (generally accepted accounting principles), which is a big obstacle for investors and firms planning to enter the markets.
The European Union has already announced some initiatives in the context of the Juncker investment plan, in which €5 billion were earmarked to support risk financing for SMEs. These include the standardization of credit information, amendments to the Prospectus Directive and a private placement regime.
(The study can be downloaded here)