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Financing of the EU economy - Fragmentation risks in the EU and potential impacts

Towards a globally integrated and institutionally strengthened Europe

By Prof. Weber Axel A. - Chairman of the Board of Directors, UBS Group AG

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To remain an attractive investment destination, the EU must show that it can deliver long-term sustainable growth. For this purpose, the EU will need to embrace a new, flexible operating model, one that fully reflects that the EU is integrating on different levels and at multiple speeds: deeper Eurozone integration, a new opt-out for the UK from an ever closer union, greater use of enhanced cooperation. A more ambitious growth objective does not require an “optimal”, fully integrated economic, monetary and / or fiscal union. In order to move forward, a certain pragmatism has to prevail as existing instruments can be refined to create a politically viable process, balancing the interests of insiders and outsiders of each of the various institutional sub-structures. In a variable geometry, strong leadership is needed to allow for a deeper integration for some, whilst striking a delicate balance among competing interests of the remaining EU member countries. As the ECB has taken that role for the Banking Union, its relationship with EBA needs a careful review. By the same token, the Capital Markets Union needs a strong Pan-European body to oversee implementation of the action plan’s different phases and interface with third country regulators.

In such a complex institutional ecosystem, effective collaboration between constituent authorities becomes ever more essential: EU institutions need to collaborate with each other, with national competent authorities as well as with their third country counterparts. The aim must be to enhance clarity regarding both the desired timing and outcomes of reforms and to consistently as well as to transparently manage political, economic and regulatory transitions as smoothly as possible.

In terms of thematic priorities, and given the persistent low growth environment, specific emphasis should be given to the effective implementation of structural reforms and ensuring an open international access to the EU single market.

First, with the benefits from accommodative monetary policy fading, the implementation of structural reforms becomes ever more urgent in order to generate sustainable growth in the EU. Too much time and opportunities have already passed. While oftentimes politically unpopular, structural reforms such as reducing labour market segmentation between permanent and temporary employees, eliminating hurdles to launching a business, liberalizing product markets even more and creating deeper capital markets would boost potential growth. EU institutional leadership is crucial here – the European Commission can be vested with more powers to address non-compliance with structural reforms and to foster collaboration both among specific authorities as well as member states, for example in terms of the exchange of best practices.

Secondly, the EU needs to establish a clearer and more predictable mechanism for its key trading partners to gain access to EU financial markets –a prerequisite for increasing investments into the EU and supporting the EU’s growth agenda. While there are efforts to improve the market access regime, it is not consistent across different areas of financial regulation. In the same vein, the Capital Markets Union should open up the EU to global capital markets and foster integration of its disparate set of national capital markets into the global market, and not only direct its attention to removing internal barriers to capital flows. As an example, a Simple, Transparent and Standardised (STS) securitization regime that is open to both EU and non-EU originated and sponsored securitizations meeting the relevant criteria is needed. Any restrictions on non-EU securitizations being eligible for STS status will undermine the objective of diversifying funding sources and unlocking capital in the EU, as the range of banks willing to originate securitisations of EU assets will be reduced.