A shadow fell over Capital Markets Union (CMU) after the UK’s Brexit vote. However, Vice President Dombrovskis, the new European Commission official responsible for CMU, is showing determination to keep the project on course, including a recent communication sent to other EU institutions calling for an acceleration of reforms. The key challenge for those wanting CMU to succeed will be maintaining momentum on the major building blocks while factoring in optionality for the outcomes of the UK’s Brexit negotiations.
CMU always had a hard task. It lacks the attention-grabbing initiatives of the post-crisis regulatory agenda. Instead, it focuses on the underlying building blocks required to allow capital markets to develop: to boost levels of investment and rebalance the dependence on bank-financing within Europe.
Since the UK referendum result, many have speculated that CMU could not survive because much of Europe’s capital markets activity is linked to the UK. In particular, much of the current capabilities in CMU topics such as corporate bonds, personal pensions and private Equity are UK-based. The Federation of European Stock Exchanges (FESE) points to the fact that Europe has fallen into third place behind the US and Asia in stock market listings, and that the majority of European listings happen in the UK.
However, there remains wide-spread support for CMU’s ambition to build more vibrant market-financing options for growing businesses and to break down barriers limiting investment opportunities Vice President Dombrovskis’ early speeches made the case that Brexit made CMU all the more important as Europe without the UK would need to develop its capabilities. The levels of personal savings in cash rather than long-term investments are significantly higher when the UK’s figures are removed.
The recent European Commission communication ‘Accelerating Reform’ sent to other EU institutions is a call to action to hasten progress. The Commission highlights the progress in proposals on simplified securitizations, reform of prospectuses and venture capital investment, all of which need MEPs and member states to finalize negotiations. On changes to insolvency laws, simplified withholding tax procedures, debt tax-bias and favorable treatment of SME loans in bank capital requirements, the Commission will announce proposals in the coming weeks. In 2017 we will see actions on supervision, EU personal pensions, ‘Green’ bonds, regulatory framework for FinTech, and to tackle barriers limiting cross-border investment management. Progress is also planned on some longer term issues including improving the post-trade landscape, barriers to free movement of capital and improvements on overlaps and inconsistency in financial regulation from the Call for Evidence exercise.
Evidence on the ground is for continued activity behind CMU. The Commission has working groups and is holding workshops with stakeholders to get into the detail of issues. For those in industry with much to gain from CMU there should be a renewed effort to positively engage with the Commission on its activities. For businesses active in capital markets, Brexit means additional optionality is needed to deal with the consequences of negotiations as a CMU linked in part to the UK will be different from a CMU purely for the EU27.