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BackThe Capital Markets Union has been on the Brussels agenda for many years. It is once again very present in the current discussions under the new name of “Savings and Investments Union”. Which steps have been taken so far and what is still to come? What are the risks associated with the Capital Markets Union and what is standing in the way of its completion? We spoke to Thierry Philipponnat, chief economist at the Brussels-based think tank Finance Watch. His explanations offer not only an interesting overview but also fascinating insights into the financial sector’s perspective.
For years, the Capital Markets Union (CMU), recently rebranded as the Savings and Investments Union, has been a cornerstone of European discussions. In the second part of Ursula von der Leyen’s presidency, the idea of deepening the CMU to tackle Europe’s enormous investment needs is given greater prominence, continuing an effort that has been going on for years. AK continues to be extremely critical of many of the proposals and measures within the framework of the CMU. From AK's point of view, the protective interests of private retail investors and employees as well as financial market stability must by no means be subordinated to private capital interests.
Overall, the path towards CMU has been complex so far. Although numerous initiatives have been launched, significant structural and regulatory hurdles remain. A conversation between AK EUROPA and Finance Watch’s chief economist, Thierry Philipponnat, explores the progress, challenges, and risks of CMU.
AK EUROPA: The Capital Market Union has been in discussion for years and consists of many different initiatives and projects, some of which are also unrelated. Can you give us a quick overview over what has been addressed in the past?
Thierry Philipponnat: The inception of the Capital Markets Union was Jean-Claude Jucker’s maiden speech before the European Parliament over 10 years ago, inspired by his predecessor’s Banking Union initiative. The EU’s 28 member states at the time all had separate capital markets. The idea was that if you bring all those capital markets together, there will be a deeper capital market. So, there will be more access to private capital for European companies and therefore it will be good for the development of the European economy.
The reference since they started the CMU has been the US capital market, which indeed is unrivalled in its enormous depth and its ability to bring massive amounts of capital to companies. A number of initiatives have been taken with the goal of reaching a similar market capitalisation in the EU. In Finance Watch's view, some of those initiatives made sense, some were of limited interest and some of them were not even good. Some examples are the simplification of the prospectus regulation for issuers, the promotion of securitization via the STS framework or having a single tape providing information on stock market prices. Other examples include the creation of ELTIFs, European Long-Term Investment Funds, or the pension initiative PEPP, which goes in the direction of having, if not common pensions, at least compatible and portable pension systems across the EU.
All of those debatable initiatives were low-hanging fruit, the easiest targets, and there is no doubt that they did not create a capital markets union. Why? First, because the Capital Markets Union is about having one rule for everybody and having a supervisor applying the rules the same way in all the countries. Today, we have 27 EU countries with 27 so-called NCAs, National Competent Authorities, who have different approaches, who barely coordinate with one another, and who effectively apply the rules in a non-coherent manner. Added to that come very divergent transpositions of EU directives. The aim is to have one single supervisor to apply the same rule to everybody.
AK EUROPA: Mr. Philipponnat, would you only address financial capital market rules or go further than that? Insolvency rules for example are also very often mentioned in the context of the Capital Markets Union.
Philipponnat: In addition to capital market rules, insolvency rules, corporate law rules and tax issues must be addressed as well. Those are the three biggest issues, on top of having a single supervisor applying harmonised rules for capital markets. Insolvency rules are fundamental when you look at the bond market. Obviously, one of the questions when you're a bond investor is what happens to me as a creditor of the company if the company goes bankrupt. As long as you have different insolvency rules, by definition, you cannot have the same market for Austrian bonds and for Spanish bonds. Corporate law is very important for equity investors. Typically, corporate law will tell you how you organize your Annual General Meetings, how the board functions, who holds which power, whether shareholders can pass resolutions, etc. The third issue is tax law. Today, there are huge discrepancies within the EU between the tax treatment of issuers and of corporations. Some EU countries even play on the tax side to attract issuers to their marketplaces. So-called regulatory arbitrage has become common practice among member states, systematically undermining all serious efforts towards a Capital Markets Union.
AK EUROPA: When reading the Draghi report, the Letta report and the Noyer report, one proposal that comes up again and again is the promotion of private pension funds. Can the ongoing debates be interpreted as a step towards privatisation of the pension system under the guise of the Capital Markets Union?
Philipponnat: From a purely financial technical point of view, if you have all pension systems investing all pension money into capital markets, you have a huge pool of capital available for companies to tap. But of course, pensions are before anything else about people, about political choices. Many pension systems working on capitalisation are having big financial troubles at the moment. The commitments towards future pensioners might not be met given the performance of capital markets. Aside from the purely technical, the political and social implications are enormous. In many countries, trade unions strongly oppose such reforms, and they will keep fighting them, as well, in the future.
AK EUROPA: Other than private pension funds, which initiatives do you see coming with the Capital Markets Union under its new name of Savings and Investments Union?
Philipponnat: At this point in time this is hard to tell. There have been talks about savings accounts for EU citizens that would simplify investing into the capital markets. I am not convinced this is going to change anything. Such a concept has been tried before, for instance in France, and despite the new legal wrapping, those accounts did not make a difference for regular people to start investing into equity. The tax incentives that came along with those equity accounts were mostly used by the wealthy and the privileged that were already investing in equity.
At the end of the day, I believe it all comes down to differences in culture. Denmark has an equity market capitalization of 190% of GDP, close to the US, while Italy’s is around 35%. Those cultural differences will be hard to tackle by regulation.
AK EUROPA: Within the debate on the CMU, there are voices advocating for a European safe asset. Could you elaborate on the role of a safe asset and its connection to the CMU?
Philipponnat: The safe asset debate comes from the dominant way of investing. There is something called a risk-free interest rate and a credit spread added on top when money is lent to a borrower. The risk-free rate is the interest rate paid by a safe asset, so an asset that is supposed to be risk-free. Today in the EU, given that the Euro is an incomplete currency, there is no such thing as a safe asset. Technically, when any Eurozone country borrows money in Euro, it borrows in a foreign currency, a currency it doesn't control. When the US borrows in dollars, it controls the currency. When Japan does the same thing, the UK, Switzerland, they control the currency. When Austria, Belgium, France, Italy, even Germany, borrow in Euro, they cannot just print the money needed for paying back. Moreover, there is no budget and no common fiscal policy behind the Euro. A safe asset is something we could have in the EU that would look like a T-bond, the T-bond being the US safe asset. The answer to this is European bonds, which would require resources at EU level for paying them back. That means either higher contributions by the member states, which would be challenging, or giving the EU its own resources, which is an even bigger and a highly political debate.
The opinions and views expressed in this interview are those of Finance Watch and do not reflect the positions of AK. This interview has been split into two parts. The second part will follow in a future issue of our Newsletter.
Further information
AK EUROPA: Capital Markets Union. Let’s be careful!
Finance Watch: Report - Europe’s coming investment crisis
AK EUROPA: The Draghi Report. Competitiveness at the centre of EU policy
AK EUROPA: "Much more than a market". Leave no one behind in the Single Market
EU Commission: Capital markets union 2020 action plan