In this article, we will discuss the importance of a capital markets union (CMU) in Europe and how it can be achieved. A CMU is a project that aims to develop integrated and efficient capital markets across the European Union (EU). By linking up capital markets, Europe can overcome the limitations of fragmented financial markets and unlock the potential for economic growth and investment. We will explore the historical lessons from the development of capital markets, the current challenges faced by Europe, and the key ingredients for success in establishing a CMU.
Historical Lessons from the Development of Capital Markets
To understand the importance of a CMU, we can look at historical examples, such as the development of capital markets in the United States during the 19th century. At that time, the US financial market was highly fragmented, with individual states limiting the chartering of banks. This fragmentation created a fundamental mismatch in the economy. While the United States had a "single market" in goods and services, the banking system was not operating on a similar scale, making it difficult to meet the financing needs of transformative projects like the railroads.
To overcome this challenge, entrepreneurs and investors filled the financing gap by developing capital markets. The critical role of railroads in the country's future led to the establishment of capital markets that tapped into a deeper pool of domestic and foreign investors. This enabled significant investment in railway projects, driving economic growth and development. The lesson here is that a capital markets union emerges when there is a need to finance an economic transformation that exceeds the capacities of fragmented financial markets.
The Current Challenges Faced by Europe
Europe is currently facing a series of common challenges, including deglobalization, demographics, and decarbonization. The global economy is fragmenting into competing blocs, and Europe needs to reassess supply chains and invest in new ones that are safer, more efficient, and closer to home. Additionally, the euro area is experiencing a continuous decline in the working-age population, which will impact productivity and economic growth. Furthermore, the need for climate action is increasing, requiring significant investment in the green transition and digital transformation.
Addressing these challenges requires a generational effort and massive investment in a short period of time. However, the existing framework for financing this investment is insufficient. Governments have high debt levels, and European recovery funding will end in 2026. Banks play a crucial role, but they cannot bear all the risk on their balance sheets. To finance these transitions successfully, Europe needs a well-functioning CMU.
The Importance of a Capital Markets Union
A CMU is essential for Europe to overcome the challenges it faces and achieve sustainable economic growth. However, the development of a CMU has been slow, and Europe's capital market remains fragmented. Financial integration is lower than before the financial crisis, and EU venture capital lags significantly behind the United States. This lack of integration hinders the ability of existing firms to access the financing they need for digitalization and decarbonization. It also limits the growth and investment opportunities for young, disruptive firms that drive innovation.
A genuine CMU would address these challenges by creating a sufficiently large securitization market, allowing banks to transfer risk to investors and unlock additional lending. It would also provide young firms with access to the quality financing they need to grow and innovate. The rapid development of a CMU could lead to thousands of additional companies across Europe raising billions of euros each year.
Key Ingredients for Success
To achieve a CMU, two key ingredients are crucial: unwavering determination and a change in approach. The unwavering determination of all actors, both in the public and private sectors, is essential. Just as the US railroads depended on the will of entrepreneurs, investors, and substantial political backing, Europe needs all parties to rally around the CMU project. The future prosperity of Europe depends on it.
In terms of approach, a shift from a bottom-up to a top-down approach is necessary. The current bottom-up approach focuses on developing local and regional capital markets, but it has not provided sufficient incentives for stakeholders to build a European market. To overcome this, a top-down approach is needed, involving the creation of a strong institution and a single rulebook enforced by a unified supervisor. This would mitigate systemic risks and ensure a level playing field for all market participants.
Additionally, consolidated market infrastructures, such as a European consolidated tape, can encourage larger, cross-border integrated market infrastructure and exchange groups. These infrastructures have proven to enhance market depth, liquidity, and the development of larger capital markets.
In conclusion, a capital markets union is crucial for Europe to overcome the challenges it faces and achieve sustainable economic growth. By learning from historical examples and adopting the right approach, Europe can develop integrated and efficient capital markets that support investment, innovation, and economic transformation. The unwavering determination of all actors, along with a top-down approach and consolidated market infrastructures, are key ingredients for success. It is time for Europe to take bold action and establish a CMU that will drive its future prosperity.