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Erscheinung:22.10.2020 “Driving the Capital Markets Union forward – especially now”
A single European capital market is better than 27 national ones – Felix Hufeld is convinced of this. A call for action by BaFin’s President, halfway through Germany’s EU Council Presidency during the coronavirus pandemic.
The European Union’s motto “United in Diversity” is one of the official symbols of the EU. It also fits well with one of the EU’s most important projects for the future: the Capital Markets Union (CMU) (see info box below). To achieve this, there definitely needs to be an even closer union which still leaves room for national traits at the same time.1
EU Member States have already made some important progress towards the Capital Markets Union. But there is still some work to do. Fresh momentum has recently built up, which Europe should use to make good progress in completing the CMU.
Definition:Capital Markets Union
The Capital Markets Union (CMU) aims to promote the free movement of capital in the EU, which is one of the four fundamental freedoms of the Single Market. The CMU is also aimed at:
- creating a single market for capital by removing obstacles to cross-border investment,
- improving access to financial resources for all companies,
- diversifying financing opportunities for businesses and reducing the cost of raising capital,
- maximising the benefits of capital markets so that they can contribute to economic growth and job creation in the EU,
- helping small and medium-sized enterprises to raise capital more easily and improving access to equity and venture capital in particular, and
- attracting investment in the EU from all over the world and increasing competitiveness.
Far beyond the euro
The Capital Markets Union goes well beyond another symbol of the European Union: the euro. Capital should flow freely not only between Berlin and Paris, but also between Berlin and Prague – i.e. across monetary borders. The greater the degree of integration achieved, the more likely it is that the many companies seeking capital will be able to tap into new, alternative and favourable financing opportunities. In light of the coronavirus pandemic, this is important for small and medium-sized enterprises (SMEs) in particular.
The UK also had an established position in the Capital Markets Union. But unfortunately, it has decided to leave the club. Brexit has also increased the pressure to act. Up until last year, the EU had a very large capital market hub in London. Now that this hub is outside its boundaries, the EU can only play a limited role in setting the rules of the game there. The remaining 27 EU countries therefore need to further develop their own capabilities in this respect.
This is not the only challenge. In order to make the European capital market more homogeneous, transparent and consumer-friendly, minimum standards in insolvency law need to be harmonised, tax rules need to be simplified, company law rules need to be standardised and consumer education needs to be strengthened.
Pan-European pensions
The EU still has a buy-side that is far too weak compared to the US. And there is still a weak European investor structure in relation to the EU’s economic output. This is particularly true for the heavyweight EU countries of Germany and France. An ideal starting point to address this shortcoming is the further development of funded pension schemes within the Capital Markets Union, particularly in the area of occupational pensions. The EU has also laid the foundations for a pan-European pension system, which is something to be welcomed. The Pan-European Personal Pension Product (PEPP) is designed to be a simple, transparent and affordable solution to complement private pension schemes, especially for mobile individuals working in different countries. Insured persons would then be able to take their pension entitlements with them from one EU Member State to another and continue to save up for old age with the same product. This will make the PEPP a pioneer even if it does not turn out to be a product for the mass market.
Blockchain technology
Of course, technological progress and the rise in digitalisation play an increasingly important role in global capital markets, too. Blockchain technology can be used both as an underlying technology for services and as a means of payment. It can therefore be assumed that blockchain applications will be key drivers of digital transformation. In order for this technology to reach its full potential in the EU, trust is needed. Only a robust legal framework can guarantee this. Firstly, it must not stifle but must promote innovation. Secondly, it must have a protective effect on two fronts: protecting both financial stability and investors.
Electronic securities
In August, the Federal Ministry of Finance published a draft law on the introduction of electronic securities. This can also provide fruitful ideas for the Capital Markets Union. Electronic securities allow companies to gain fast and low-cost access to the capital market, which is likely to be very attractive, especially for SMEs. Investors – including retail investors – have a wide range of products to choose from and can invest at a low cost and on a small scale – and thus diversify their risks.
Outlook
A strong and vibrant Capital Markets Union cannot be established overnight. Both the ‘U’ – i.e. greater harmonisation of the European Single Market – and the ‘M’ – i.e. the assiduous development of Europe’s own capital markets in different segments – need to be strengthened. This can only be achieved with the combined efforts of politicians, regulators and key players in the financial sector, and requires both focus and stamina. The European Commission has announced an action plan for the autumn this year – another important milestone towards a strong Capital Markets Union.
Fußnote:
- 1This article is based on a speech given by BaFin President Felix Hufeld at the Eurofi High Level Seminar on 10 September 2020.
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