The European Union has finished the first half of its match to create a common capital market among the 27 EU member states. But there’s still a second half ahead, with obstacles such as how to continue the project without the United Kingdom.
The Capital Markets Union (CMU) marks a step forward in the elimination of barriers to the movement of capital, investments and financing among the different members of the EU. But in practice, what does that mean for European citizens? It will allow, for example, a Spanish SME to access financing sources – banking and non-banking – in another country, such as Germany or France; or permit an Italian citizen to transfer money to Portugal or to apply for a mortgage loan in Holland or Belgium.
The EU is striving to make a success of this flagship project, which began in September 2015. For that reason, the European Commission held a public hearing to analyze the principal contributions to a public consultation launched at the halfway mark of the Action Plan for the Capital Markets Union. The participants included members of the European Commission, legislators and representatives of the finance industry.
More than 50% of the Action Plan for the Union of Capital Markets has already been completed. However, the conclusions of the more than 180 contributions to the consultation point to the need to achieve a greater regulatory convergence and to promote access to financing for SMEs. BBVA Research says that “it´s necessary to continue working on the five challenges to making the CMU relevant: Brexit, fintech, the supervisory framework, sustainable financing and the geographic scope of the capital markets.”
Among the new challenges identified, Brexit stands out. Both the legislators and the representatives of the finance industry have said that Brexit will suppose a loss of liquidity in the markets of the 27 EU member states. On the other hand, the relationship between the common market and third countries was not designed with Brexit in mind. The regulator - the European Securities and Markets Authority (ESMA) – has a key role to play in establishing the new framework between the United Kingdom and the EU as regards capital markets.
Going forward, the EU has three priorities related to the Capital Markets Union:
- Individual pension plans. The European Commission will work on a proposal for a Pan-European Pension Plan (PEPP). The idea is that this product can function in parallel to the national pension regimes. However the proposal raises a fiscal problem. As the Pensions Institute at BBVA explains, “it´s hard to imagine that consumers will want to invest in products whose tax advantage comes about at the time of retirement – as opposed to the national pension plans, the majority of which have a tax advantage at the time the contributions are made.” For example, it continues, “ unless a common fiscal framework and a portability regime is established for these products, it´s difficult to think that a Pan-European Pension Plan (PEPP) can achieve success, given the current national plans.”
- Promoting the FinTech sector and guaranteeing that the regulatory environment can achieve a balance between permitting innovative development and guaranteeing the confidence of investors. In the digital space, the EU also has to face the challenge posed by the fragmentation of supervision and the new areas of interaction between the fintech world and the Capital Markets Union, such as crowdfunding, the use of robo-advixors (or virtual consultant/managers), the blockchain infrastructure, etc.
- Sustainable financing. Sustainable investment is at the center of the construction of the CMU. To achieve it, the EU has created a group of high-level experts. The group will propose operative policy recommendations about the path to an efficient program of sustainable financing for the EU by the end of 2017.
The Commission hopes to publish its conclusions before the summer and to prepare a “Capital Markets Union 2.0,” without the United Kingdom.