Capital Markets Union III

Efforts to put in place a single market for capital started already with the Treaty of Rome and more in-depth discussions about a “single market” for financial services have been had at least since the 1990s. It was however Jean-Claude Juncker, in his successful campaign to be elected President of the European Commission, who placed the Capital Markets Union (CMU) initiative on the agenda of the EU.

In a speech to the European Parliament (EP) in Strasbourg on 15th July 2014, Mr. Juncker said that “the new European rules for banks should be complemented with a Capital Markets Union. To improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notable for SMEs, and help reduce our very high dependence on bank funding. This would also increase the attractiveness of Europe as a place to invest.”

Based on this political guidance from Mr. Juncker, the Commission went to work, and the first CMU Action Plan was adopted in 2015 (CMU I). The initial plan was updated following a mid-term review in 2017. With CMU I, the EU set out to create a genuine single market for capital across the EU, with the aim to make it possible for investors and companies, large and small, to access a full range of financial services and products.

The vision was and still is that CMU should bring value to all Europeans, wherever they live and work. Citizens of smaller Member States with less developed capital markets should get the same access to financial services as those who live in larger more established financial centers.

In the end, agreement was reached between the Member States in the Council (the Council) and the EP on 12 out of 13 legislative proposals included in CMU I, although not all of them in the exact form originally proposed by the Commission.

Work on the CMU was continued also by the next Commission, and a new action plan was presented in September 2020 (CMU II) followed by a status report in November 2021. CMU II had a list of 16 new actions and set out to achieve the following three key objectives:

– support a green, digital, inclusive, and resilient economic recovery by making financing more accessible to European companies;

– make the EU an even safer place for individuals to save and invest long-term;

– integrate national capital markets into a genuine single market.

At the end of 2023, we can conclude that important steps have been taken under CMU II. Proposals have been presented and agreements have in some cases been reached e.g. on a European Single Access Point to provide investors with easy access to financial and sustainability-related company information (action 1), on simplified listing rules for public markets to promote and diversify small and innovative companies’ access to funding (action 2), a strategy to increase retail participation in capital markets (action 8), rules to provide for faster and safer relief of excess withholding taxes (action 10), and rules to establish a post-trade consolidated tape for equity and equity-like financial instruments (action 14).

With these actions, good progress has been made when it comes to integration of capital markets in the EU. Most of the proposed actions have been of a legislative nature, but some actions including the initiatives on financial literacy (action 7) and on supporting people in their retirement (action 9) have taken other forms.

Most EU citizens hold a large share of their assets in real estate, bank accounts, or other investments outside of capital markets. An exception to this is Sweden, which in the report “EU capital markets: a new call to action” by New Financial published in September 2023 was referred to as “[t]he poster child of capital markets” as Sweden, relative to the size of its economy, has the deepest and most developed capital markets of any major economy in Europe.

Behind Sweden’s success lies several factors including encouragement to save and tax incentives from a succession of governments, widespread use of “investment savings accounts” easing the administrative burden on retail investors, a relatively high degree of financial literacy, and a long history generally of digitalization in society.

The Swedish example shows that it is possible for local capital markets to thrive in the EU. Our capital markets are however at different levels of maturity, and if we are to achieve the CMU vision some changes may have to be made to our investment culture. Tax and other incentives may help to increase retail participation in capital markets, as may an increased level of financial literacy. It is important that children, starting already in school, as well as adults, are provided with the right tools to understand financial information.

Institutional investors are crucial for the development of deep capital markets. In line with this, action 4 of CMU II sets out to remove regulatory obstacles for insurance companies to invest long-term, provide for an appropriate prudential treatment of long-term SME equity investment by banks, and assessing possibilities of promoting market-making activities by banks and other financial firms.

Sovereign and public pension funds need to channel more capital into equity markets. While issues relating to national pension systems are generally decided by Member States, some initiatives can still be taken at EU-level. One such initiative is action 9 of CMU II which provides for the facilitation of the monitoring of pension adequacy in Member States through the development of pension dashboards and of best practices for setting up national tracking systems for individual Europeans, as well as an analysis of auto-enrolment practices and other practices to stimulate participation in occupational pension schemes.

From an EU perspective, a specific challenge is the uneven distribution of pension funds in the EU. As noted in the above-mentioned report by New Financial, the Netherlands, Denmark, and Sweden combined account for nearly two thirds of the EU’s pension assets – 3 trillion euro in 2022 alone – but only 12% of EU GDP. If more Member States allocated more of their pension funds to capital markets, it would be very positive from a CMU-perspective.

To get deeper and more well-functioning capital markets, both institutional and retail investors need securities in which they can invest. We also need more companies in the EU that are willing to list on exchanges where their shares can be publicly traded, and where additional capital can be raised as the company grows. The listing act is here a step in the right direction and once implemented the new rules will contribute to making initial public offerings (IPOs) less complex and less expensive, with IPO-prospectuses that are less extensive.

This said, we must not underestimate the challenge ahead of us. As the Presidents of the European Council, European Commission, Eurogroup, ECB and EIB noted in the op-ed “Channeling Europe’s savings into growth” on 9^th March 2023, “the EU’s stock market capitalization is less than half of the United States, in percentage of GDP, and lower than that of Japan, China and the United Kingdom. Yet, Europeans save more than Americans.”

With the challenges that have arisen in the last few years, with Brexit, the climate and energy crisis, the pandemic, a challenging economic environment, geopolitical tensions, and the war in Ukraine, the CMU project initiated by Mr. Juncker in 2015 is still important, possibly more so than ever.

This was also noted during a meeting in Stockholm on 28th April 2023 between the Chair of the Economic and Monetary Affairs Committee of the EP, the Swedish Finance Minister, the Swedish Financial Markets Minister, the Spanish Vice-President and Minister for Economy and Digitalization, the Belgian Vice-Prime Minister and Finance Minister, and Commissioner Mc Guinness: “Now is the time to push forward the Capital Markets Union with ambition and speed. We cannot afford to wait. As representatives of the European Parliament, Member States, and the European Commission, we will show political courage and determination to conclude legislative work on all the outstanding CMU legislative proposals.”

In line with the above statement, the Spanish and Belgian Council Presidencies and the EP are working hard to conclude as many actions as possible set out in CMU II, before the end of the present mandate of the Commission and the EP. At the same time, discussions have started, at least on an informal basis, on “CMU II the Sequel” or “CMU III”.

Before shifting focus from CMU II to CMU III, we need to take stock of what has been achieved so far. Some actions set out in CMU II have yet to be agreed and will after that have to be implemented in practice. At the same time, it is possible to note a certain degree of “regulatory fatigue” amongst capital markets participants, following a period of intense rulemaking. It is thus important that we do not rush to put together yet another bundle of regulatory actions but take some time to reflect and to discuss next steps.

As part of the analysis of CMU II, we should look at the approaches taken so far, if they have worked and what we have achieved. Some approaches used historically may not be the right ones for the future. While most CMU actions have so far been of a “top-down” and often legislative character, we may going forward want to spend some more time looking for “bottom-up” initiatives to develop capital markets on a local as well as EU-level.

When considering what could be included in a forthcoming CMU III, we may first want to look at CMU II actions that have yet to be agreed, as well as actions that have yet to be fully implemented and effective.

The listing act proposal presented in December 2022 with the aim to simplify listing and post-listing processes can be taken as a good example of a “top-down” initiative which will make a positive difference to EU capital markets, but it needs time to be implemented. While waiting for this to happen, more can be done, on a “bottom-up” basis, to make our public capital markets more attractive for EU as well as non-EU investors and companies.

One way of taking this action forward could be to gather relevant stakeholders to discuss and exchange ideas on how we can work together to build deeper capital markets in the EU. As part of this exercise, we could discuss around and learn from experiences made in local capital markets, potentially finding initiatives worth to be replicated on a local basis or as part of a joint effort in the EU.

In this connection we may also want to discuss if full harmonization at all levels may need to be balanced against local practices, if we want local capital markets that work in all Member States. While the “one-size-fits-all” approach may work in certain cases, it may not work in all situations. It is further possible that we need to put more emphasis on subsidiarity and proportionality, if we want capital markets with large as well as small and medium-sized market participants in the EU.

Striving towards the vision of having capital markets open to and used by all, we must make sure to equip retail investors with the tools required to enable them to understand information from providers of and advisors on financial products and services. While the Commission and the OECD have in a joint effort delivered on the financial literacy action in CMU II, more remains to be done at national level. It is here important that the work on financial literacy starts at an early stage, already in school, and continues as part of a life-long learning process.

Finally, while tax matters generally are in the hands of Member States, complex and lengthy withholding tax procedures form a very real barrier to cross-border trading in capital markets. If we want to increase institutional and retail cross-border trading in capital markets in the EU, we must make withholding tax procedures swifter and less complex. The CMU II action on building a common, standardized, EU-wide system for withholding tax relief at source, aimed at lowering costs for cross-border investors and prevent tax fraud, is thus of great importance and once it has been agreed it has to be properly implemented.

To conclude, we have come quite a long way since the CMU project was initiated by Mr. Juncker in 2015, and we still have some work to do before we can fully close the chapter on CMU II. Once this is done, the actions taken in CMU I and II will form an excellent platform on which to continue our work. This means that we must not rush into drafting a new action plan but need to take the time necessary to get the analysis right. We must also make sure to involve all relevant stakeholders in the discussion and learn from experiences already made in capital markets in and outside of the EU.

On my side, I very much look forward to the interesting and very important discussion on what to include, in due course, in CMU III.