EU unveils plan to accelerate Capital Markets Union ahead of London’s departure from the bloc

Skyline of the City of London, Europe’s largest financial centre. (Source: EC – Audiovisual Service / Photo: Jack Taylor)

Last week the European Commission unveiled it is taking further steps to develop the Capital Markets Union, a plan to support growth and investment in the Old Continent. The project, which aims at creating a single European market for capital, has been sitting in the agenda since 2015, but the UK’s exit from the bloc has made the need to strengthen a EU27 market more urgent. The EU will soon lose its largest financial hub and a plan to “compensate” for London’s departure is definitely a top priority for Brussels.

Background

The CMU is a pivotal project of the Juncker Commission and a key pillar of a wider Commission’s Investment Plan for Europe, as also underlined last week by an official EC press release. Launched in September 2015, the CMU officially seeks to strengthen the flow of private capital to growing businesses and infrastructure investment, whilst its ultimate goal is to give to the European companies more diverse sources of capital and reduce the reliance on banks. The CMU Action Plan by the European Commission, launched on September 30, 2015, was intended to establish an integrated capital market in the European Union by 2019. However, the decision of Britain, EU’s largest financial centre, to leave the bloc in the same year, made the need to accelerate the CMU project more urgent.

Mid-term review

So last Thursday, after almost two years since the launch of the CMU Action Plan, the Commission presented a mid-term review of the project, officially to check whether the project was still on track, but also to look for ways to create an alternative financial market to London. European Commission Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union, was indeed very clear: “As we face the departure of the largest EU financial centre, we are committed to stepping up our efforts to further strengthen and integrate the EU capital markets”, he said. “This review makes clear the scale of the challenge and we count on the support of the European Parliament and Member States to rise to it”, Mr. Dombrovskis added.

According to the European Commission, the Mid-Term Review reported on the “good progress” made so far in implementing the 2015 Action Plan, with around two-thirds of the 33 actions delivered in twenty months. European Commission Vice-President Jyrki Katainen, responsible for Jobs, Growth and Investment, said: “The Commission has worked hard to give decisive impetus to the CMU. In just twenty months, we have delivered two-thirds of our initial commitments and other important actions are in the pipeline”. “The new measures presented here today renew and reinforce the Commission’s commitment and set us on an irreversible path towards the CMU”, Mr. Katainen also declared.

Key initiatives and open points

The Commission also set out nine priority initiatives on Thursday as part of the project’s mid-term review. These include actions to direct supervisory powers for the EU’s securities watchdog, to provide guidance on existing EU rules for the treatment of cross-border EU investments and helping banks to offload bad loan. In particular, a huge test will be how much progress Brussels can ever make in this last point, which is actually what led this week to European authorities intervening to avoid a collapse of Spain’s Banco Popular.

Recent reports show that, as of the third quarter of 2016, the so-called non-performing loans of significant institutions in the euro area amounted to €921 billion, representing 6.4% of total loans and equivalent to nearly 9% of the euro area GDP. The ratio of NPLs is still at two digit level in six Euro area countries: Cyprus, Greece, Italy, Ireland, Portugal and Slovenia.

Reactions

The reaction to the news was generally positive, with a few exceptions though. AFME, the Association for Financial Markets in Europe welcomed the CMU mid-term review. “The CMU project is more important than ever to boost growth and investment and to channel capital to the real economy”, said Simon Lewis, Chief Executive at AFME. “AFME supports the wide-ranging initiatives put forward in the review and looks forward to working with legislators to put the remaining building blocks in place”, he also said.

Insurers Europe, the European insurance federation, despite welcoming most of the steps taken by the EC so far, said it is “regrettable” that the CMU mid-term review does not include “more ambitious proposals to remove disincentives to insurers investing long-term”. “As we enter the final stage of the CMU project, we look to the Commission to recommend more determined solutions for the treatment of long-term investments in general, and of long-term equity investments more urgently”, said Michaela Koller, director general of Insurance Europe.

Markus Ferber, vice chairman of the European Parliament’s economic affairs committee, was way more pessimistic instead, and reportedly called the review a “document of failure” that listed what has still not been accomplished. “In light of Brexit, effective and efficient European capital markets are more important than ever. Instead of devising new updates of their working plans every few years, now would be a good time for the Commission to actually make some progress”, Reuters reported Mr. Ferber as saying.

Next steps

Such huge open points and the Brexit looming say loud and clear that a concrete plan on the CMU is more than ever needed, and that a quick implementation would be the best solution. However, Commissioner Katainen said it could take “up to a decade to see results from the CMU initiatives”, as reported by Reuters. “It’s a question of whether this potential is used or not”, Katainen reportedly told a news conference.

On top of the proposed actions, the Commission said it is determined to present a “Pan-European personal pension product” by the end of June, with whom it plans to tackle the growing challenges of an ageing population. The EU’s executive arm has also said it will soon launch a consultation on action in areas such as loan servicing by third parties, and the transfer of loans, including to non-bank entities, expected in the first quarter of 2018.