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Financing of the EU economy - Is the CMU on the right track?

Capital Markets Union as part of a comprehensive Financial Union to spur investment

By La Via Vincenzo - Director General of Treasury, Ministry of Economy and Finance, Italy

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Along with the completion of the Banking Union and the Juncker Plan, the Capital Markets Union (CMU) is a key component of a financing and investment union, contributing to the more effective channeling of savings into investments. Following its launch last September, CMU set in train a promising, albeit partial, process towards such a Financial Union aimed at facilitating and diversifying the sources of funds for European business and infrastructure. Early progress on the first important and concrete steps has been remarkable: the Council reached agreement on measures to revive simple, transparent and standardized (STS) securitizations only two months after the Commission proposal and is progressing swiftly its negotiations on the revision of the Prospectus Directive; in addition, significant progress is being made in order to prepare the ground for further concrete measures.

However, it would be pretentious to believe that progress made may, on its own, lead to greater investments in SMEs and infrastructure in the short run. Beside the unsatisfactory pace of the economic recovery, the most obvious reason for this is that early measures still have to be completely enacted into law. In addition, one ought to be aware that CMU should be considered as a “single undertaking” where no single initiative will be determinant but the implementation of a package of coherent measures will really make a difference in the financing of economic activity and investment in the EU. Thus, expectations should not be overplayed and the Commission has set 2019, at the end of its mandate, as the date when CMU effects can be truly assessed.

CMU set in train a promising, albeit partial, process towards such a Financial Union.

Going forward, therefore, the EU must pursue with determination the wide array of measures set forth by the Commission and endorsed by Ecofin in its following Conclusions. Such efforts should go hand in hand with parallel action in order to address market failures and spur expectations towards greater growth, jobs and investments, as the CMU is a necessary but not sufficient condition to mobilize business financing.

As such, even though it is difficult to pick individual priority measures, one can try to single out a few of them in order to enhance non-bank finance in a truly Single Market. Reviving STS securitizations is certainly one key short term priority, as it has the merits of combining the needs of bank financing as well as those of wider capital market financing. A swift enactment of the STS package is therefore to be welcome. In the long term, unjustified barriers to the Single Market need to be dismantled so that financial funds can flow to their best uses in the entire Union. If one had to cite one measure to this effect, removing tax barriers could be a candidate. However, given that dealing with tax matters will prove to be a challenge for very well-known reasons, establishing and implementing common principles for national insolvency regimes can be cited as one realistic, albeit ambitious and not easy, priority in the long term. Insolvency regimes affect expected yields because investors have to consider, and will increasingly consider under IFRS9, the possibility of negative outcomes: if national recovery procedures diverge excessively this will have an impact on the level playing field in the Single Market.