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

A Capital Markets Union for the whole EU

By Gualtieri Roberto - MEP and Chair of the Committee on Economic and Monetary Affairs, European Parliament

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The single market is the economic centrepiece of the European Union and a core achievement of its economic integration. The free movement of capital is the most recent of the four single market freedoms. Beyond question, the single market provides the bedrock for prosperity and economic growth in Europe.

Bank financing is the most important funding source for companies in the EU, in particular for SMEs. Not surprisingly, the creation of a Banking Union aiming at restoring a stable, profitable and resilient banking sector was among the first measures taken to restore lending to the real economy. Alongside the completion of the Banking Union, the priority for achieving a true financial integration lies in the implementation of the Capital Markets Union (CMU) project.

One of the main priorities of the CMU is to improve the diversity of funding options in particular for SMEs. Throughout the Union, SMEs differ tremendously in business model, size, legal form and other characteristics. In addition, SMEs in different Member States are differently affected by a shortage of funding. But there are other reasons that make the CMU action plan a strategic component of the European strategy for growth and jobs. Better integrated capital markets with improved risk sharing resulting in more diversification of funding choices will be to the benefit of the whole European economy. The creation of a Capital Markets Union (CMU) for all 28 Member States is therefore a logical and necessary step into the direction of completing the Economic and Monetary Union. Moreover, it can encourage long-term investment, in particular in infrastructures, allowing an increase in the level of potential output of our economies. Finally, CMU must also address market failures. From this point of view, the European Fund for Strategic Investments (EFSI) represents an essential tool that should be used in a proper way.

An efficient CMU is not and should not be in contradiction with a robust regulatory framework that would prevent the occurrence of another financial crisis. However, we should assess the economic cumulative impact of this regulatory framework, especially monitoring on one hand the areas where there is overlapping and unintended consequences and, on the other hand, the possible regulatory loopholes related to shadow banking.

An efficient CMU is not and should not be in contradiction with a robust regulatory framework.

The set of measures outlined by the Commission in its CMU Action Plan are a good starting point. The proposed actions include legislative proposals but also reviews and assessments addressing many areas in financial services regulation, taxation and insolvency law. The ECON Committee has already started its work on the legislative proposals which have reached the Parliament. More legislative proposals are expected later in 2016. The results of a cumulative assessment of the impact of the EU financial services regulation as requested by the Parliament could also guide the way forward in the CMU as well as in other areas of the financial market.

It has to be reminded that effective and proportionate financial service regulation ensuring a level playing field, equal access for and fair competition among market participants in all euro and non-euro Member States is the indispensable basis for a single capital market to realise its full potential. Consistent and coherent implementation, supervision and enforcement of the rules are equally important not least for avoiding regulatory arbitrage and safeguarding financial stability.

A crucial factor for the ultimate success of the CMU is a widespread use of capital market solutions. Indispensable for this is trust in well-functioning financial markets and their institutions. Unfortunately, the recently increased market volatility has not contributed to strengthening this trust. Building up robust and justified confidence is a long-term project. Appropriate regulation including investor protection, in particular for retail investors, is key to incentivise them to channel their savings towards capital markets. Financial education of retail investors and SMEs looking for funding and providing adequate information about opportunities and risks is an important prerequisite to increase the acceptance of capital market instruments.