For more than a decade, the European Union’s policymakers have been aiming to create a deeper pan-European capital market. In recent years, those efforts have acquired more urgency.
As the think tank Bruegel recently set out:
Initially, the focus was on integrating and developing national capital markets to complement bank lending and enhance risk diversification, in order to strengthen the Economic and Monetary Union and follow on the successes of banking union. Now capital markets are in demand to meet the rising financing needs of the green and digital transitions, as Europe’s fiscal space has tightened following the COVID-19 pandemic. Mobilising private capital has become more urgent due to geopolitical uncertainties and the EU’s declining competitiveness compared to other major economies.
Despite some cyclical gains, the EU lags behind the US, UK, and China in most key indicators, such as access to capital, global interconnectedness, and market liquidity. The EU’s capital markets remain fragmented, undermining economic competitiveness on a global scale.
Europe must remove barriers to bank mergers as a fragmented financial landscape with differing national rules and customs leaves the bloc vulnerable to shocks and instability, European Central Bank supervisor Claudia Buch said on Thursday.
Europe’s largest banks are far smaller than their U.S. counterparts and the ECB regularly argues for more mergers but politicians often resist cross border takeover attempts, fearing the loss of national champions to a foreign rival.
The latest idea from the European Commission is to try to ease progress towards a pan-European capital market by establishing a so-called 28th regime. Attempts to standardise capital markets laws and regulations across the existing 27 member states of the European Union have often thrown up political economy problems. The new idea is to establish an optional ‘28th regime’ of company law, insolvency procedures, and securities regulation. Firms in the EU would then have the option of choosing either their national rulebook or the pan-European option.
But would such a plan work? The Clark Center’s European Experts Panel offered some support for the proposals last week.
The experts were first asked whether, ‘Creating a ‘28th regime’ – an optional, EU-wide code of corporate, securities and insolvency law that firms could adopt and which would pre-empt the application of any of the 27 national rulebooks – would be substantially more effective in building a European capital market than continuing efforts to achieve harmonisation of the national rulebooks’?
Weighted by confidence, 82% of respondents either strongly agreed or agreed. Although, as Olivier Blanchard of the Peterson Institute noted, ‘i see no reason not to try to do both’.
And Jan Pieter Krahnen of Goethe University Frankfurt offered a different, and intriguing, suggestion:
Building a harmonized regime is not working, so we can forget that. Building a new regime, a 28th one, is an option, but it is not the only one. An equivalent, though much cheaper solution would be to let firms choose among existing (27) regimes. Luxembourg as EU Delaware?
Even if the 28th Regime plan is not a silver bullet, it won widespread support as something worth trying.
The panel was next asked whether ‘Creating the 28th regime would substantially increase the supply of capital to new ventures and growing businesses’?
This time around – again weighted by confidence – 23% of respondents strongly agreed and 58% agreed. A few respondents noted that much depends on the definition of ‘substantially’, but again, the general sense was that such a measure would have a positive impact.
Finally, the panel was asked if ‘a well-functioning and efficient single EU capital market requires a strengthened European Securities and Markets Authority, comparable to the US Securities and Exchange Commission, to operate as a single market regulator’?
43% of respondents, weighted by confidence, strongly agreed, and another 54% agreed.
As Christian Leuz of Chicago Booth noted, ‘national regulatory agencies differ in capabilities, funding, etc. So even if there was a single EU rule book or 28th regime, without a single market regulator, there would be divergence and patchwork in implementation and enforcement’.
This, though, as ever in the sometimes-messy reality of European integration, is the likely stumbling block for further progress. Many of the 27 existing member states may well favour, in principle, moves towards a single European capital market, which could well increase the availability of finance to firms in their jurisdiction. But when push comes to shove, national governments have often proved reluctant to give up regulatory powers to a pan-European body in which they may have less clout.
Progress towards a capital markets union is vital if Europe is to boost access to finance, productivity, and, ultimately, growth and living standards. Whether that comes via further harmonisation of national standards or the creation of a new 28th regime, it will need, eventually, to be coupled with a strengthened, single market regulator.
