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Europe: deliver the CMU or risk becoming irrelevant

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Progress on the Capital Markets Union has been painfully slow, and the EU must move fast to avoid fading into obscurity

Europe needs strategic autonomy, diverse supply chains, a robust defence, and greener energy. All these transitions will be expensive. To master them and remain relevant in the global economy, access to funding is essential for companies. This year’s many crises, from geopolitical tensions to the energy shortage, have shown how urgently the EU needs deeper, more liquid capital markets.

A solution to this basic problem has been around for a long time — it just hasn't happened yet. In 2015, the European Commission launched the Capital Markets Union (CMU) to combine its many small markets with different rules and regulations into one.

So far, it has failed to deliver.

On November 17, EU financial services commissioner Mairead McGuinness told delegates at an Association for Financial Markets in Europe (Afme) event that the CMU had made “good progress”.

The same day, AFME published its annual report on CMU key performance indicators. Its assessment is less generous than that of McGuinness: “Undersized equities and securitization markets continue to perform far below their potential, holding back the EU’s competitiveness in comparison to other global markets.”

In a somewhat irritated tone, the report adds that this trend “has been observed through every edition of Afme’s CMU KPIs report over the past five years”.

The EU has implemented some changes — such as easing prospectus requirements for small and medium-sized companies looking to raise capital — but there are still no signs of deep reform. Even the European Council, another player in the notoriously slow decision-making apparatus of the EU, emphasised the need to finally make some “tangible progress” twice in a note to the European Commission in 2020.

McGuinnes did add that it was still “early days” for the CMU, but this is questionable. After seven years there has been very little progress, and frustration is growing.

At a conference of the Federation of European Securities Exchanges in Prague, Jella Benner-Heinacher, president of the investors and savers federation Better Finance, called it “grotesque” that investors in Europe were still “forced to manage 27 different withholding tax procedures”.

A few days earlier, Deutsche Bank president Christian Sewing accused the EU of a “lack of political will or unity” and predicted that it would take several more years to reach an adequate union, “even in the best case scenario”.

Sewing suggested readjusting priorities and focusing on the quick fixes, such as facilitating securitization. While this is certainly a sensible measure, it is wrong to stop pushing for progress on the CMU. If markets simply accept that the EC is moving so slowly that it is not worth pressuring it, they risk letting Europe fall even further behind the international competition.

It can not be forgotten that creating deeper capital markets with rules on taxes and shareholder participation that are easy to navigate across borders is vital for the continent’s economic future. Despite the lack of progress, the CMU is a worthwhile solution to this problem.

One essential step towards greater liquidity is the activation of retail investors. Earlier this year, the International Monetary Fund and Eurostat calculated that European consumers managed to save €1tn more than usual during the pandemic.

According to Benner-Heinacher at Better Finance, households still hold less than 6% of their savings in listed shares and bonds. “This is clearly unhealthy, as it deprives the EU capital markets of a large pool of stable liquidity,” she said.

Retail investors tend to be loyal shareholders and buy stocks with a long-term perspective. This will, once they are active in large enough numbers, make them valuable participants in IPOs and secondary transactions.

It’s not as if European citizens are averse to buying stocks, either. The surge in retail investments during the pandemic showed that they are willing to participate. Some got burned when valuations plunged and volatility surged this year, but with inflation on the rise, consumers urgently require investments to preserve and grow their savings.

This is an excellent time to double down on efforts to remove some red tape and make EU capital markets more accessible to a larger variety of investors. Given the environment we are in, it is of critical importance.