Commission eager to speed up Capital Markets Union

CMU chief promises “faster and more ambitious” rollout, but public-interest group says capital markets integration will never be as stable as fiscal union

The European Commission has announced a ‘mid-term review’ of the Capital Markets Union (CMU) project, to accelerate the pace of its work.

In a 20 January consultation paper, the Commission signalled its intent to ensure that businesses will have greater access to non-bank sources of finance, such as venture capital, private placements and crowdfunding.

Commission vice-president and CMU chief Valdis Dombrovskis said: "We have built good momentum behind the project and we are well on our way to completing the first wave of measures.

“Now, we want to move faster and be more ambitious. This mid-term review consultation will help shape the next phase of our work to build a single market for capital in Europe.”

Fellow vice-president Jyrki Katainen – who doubles as jobs, growth and investment commissioner – added: “Progress towards building CMU is crucial to strengthening the third pillar of the Investment Plan for Europe.

“It will contribute to creating an investment-friendly environment and make it cheaper and more interesting for insurance companies and banks to invest in long-term infrastructure projects.

“We are determined to deliver on our commitments and the mid-term review will allow us to ensure that the CMU Action Plan remains relevant in a changing political, economic and technological context.”

However, Finance Watch – an advocacy group that promotes the public interest in financial regulations – argued on 23 January that the Commission’s aim to promote non-bank, or “shadow-banking”, products over those from the realm of traditional banking “raises a number of concerns”. The group notes:

1. While the European economy does, indeed, rely significantly upon bank lending, that is not the same as being over-reliant.
2. A broad academic consensus holds that when an economy is financed by capital markets rather than banks, there is no meaningful impact on growth. As such, there is no valid case for governments to promote one type of finance over the other.
3. While a reliance on bank lending exposes companies to reductions in that lending, relying on funds from capital markets may arguably be far more dangerous – given financial markets’ “well-known, manic-depressive behaviour”.

The organisation also pointed out that, while it supports an integration of capital markets, using them as a means to deepen European integration will “likely never be a stable alternative to a fiscal union”.

In its assessment, a temporary convergence of borrowing rates for different member states leads to “brutal divergence” when confidence vanishes.

Finance Watch head of policy analysis Frédéric Hache said: “The current corporate tax regime allows debt interest to be deducted from taxable income, but not dividends on equity. This incentivises financial institutions to borrow excessively, in turn making them more fragile and less able to absorb potential losses.

“We welcome steps to address this bias towards debt funding. However, the review confirms that the priorities of CMU remain mostly unchanged – despite the concerns raised by civil society organisations.”

For complete details of the mid-term review, download the Commission's consultation paper here.