EU governments are rallying around the idea of boosting the economy by investing the 10 trillion euros languishing in their bank accounts into the stock market, according to Politico.
The move would not only boost companies’ cash, but also allow the money to be spent on projects that benefit society and stimulate Europe’s dwindling economy. This is part of what the European Union calls a capital markets union, according to Niels Brab, chief regulatory officer at stock exchange group Deutsche Börse.
“The capital markets union is moving from a nice-to-have to an absolutely critical must-have.”
The EU has long harboured the idea of a single market. According to European Commission President Ursula von der Leyen, her upcoming five-year term is “the time of investment,” which will begin with “completing our capital markets union.”
The European economy is trailing behind the US and China increasingly. Industry is in decline and start-ups are smaller and less successful than their foreign competitors. Stéphane Boujnah, CEO of Europe’s largest stock exchange group, Euronext, stated:
We need to finance risky innovation projects to catch up the technological gap with the US.
Creating single market
As a first step, France launched the creation of a pan-European common savings product. The aim would be to drive European savers out of low-interest bank deposits into shares to help companies grow.
There are a few exceptions, such as the Netherlands and Sweden, but in most of Europe pensions are paid by the state and funded by taxes. By contrast, the US has a 401(k), a tax-incentivised private account that invests and pays out money when people retire.
Michiel Horck, senior counsel at PGGM Investments, a Dutch pension management firm that manages €243 billion worth of assets, said:
“If you really want to boost the European economy and provide stable funding and long-term funding, looking to pension savings is a very obvious choice.”
The differences are evident in the statistics. In the US, almost 60 per cent of households own shares directly or indirectly through their pensions. In France and Germany, the figure is around 18 per cent.
The value of all companies in Europe’s stock markets, as a percentage of GDP, is half that in the US, according to a Commission report.
Ideally, a capital markets union would link what are now 27 different markets across the EU. This would allow investment to flow across borders and in the process attract more capital from savers to help finance European industry and help it compete with overseas rivals.
EU heads of government agreed in April to “relaunch” Europe’s resold debt market, known as securitisation, which has long been politically toxic in Europe because of its role in the 2007-08 financial crisis. Finance ministers also agreed in May to work on “deepening” national capital markets, which will not require legislation at EU level.
Attractive idea
The Germans like it because it can avoid the need for more EU co-borrowing, as they did during the pandemic. For France, the project is another step towards making the EU less dependent on the US. President Emmanuel Macron stated:
The rules of the game in Europe today are no longer adequate because if we look at defence and security, artificial intelligence, the decarbonisation of our economies and clean tech, we have a wall of investment. Europe — it can die.
However, making the idea a reality is not easy. Standardisation of bankruptcy laws, a major part of the project, is completely stuck. This is critical because when lenders are deciding whether or not to help finance a project, they want to be sure they know what will happen if it goes bankrupt.
In addition, in any concerted effort to create a single financial market, there will be losers. At the moment, many financial institutions within the capital markets union will be exposed to competition from across Europe. Some will not survive, either going bankrupt or being bought out by competitors. Bryan Coughlan, sustainable finance officer at the European Consumer Organisation, said:
“Very few countries are confident that their national champions would survive contact with actual competition. Everybody always says that they want open markets and competition and so forth but that’s not what happens in the actual policy settings.”
Dreams versus reality
Thierry Philipponnat, chief economist at Finance Watch, fears that some of the most optimistic results are “wishful thinking.”
Look, do it, but don’t dream it’s going to finance unprofitable projects or projects without sufficient yields. It will never be the case. And a lot of what we have to do today, in particular to combat climate change, is of that nature.
A recent Finance Watch report found that even in the best possible case, when the capital markets union is finalised, private finance can only meet a third of the EU’s green transition needs. The rest would have to come from the public purse.
While the project is still in the design phase, the risk is that the capital markets union allows politicians to sidestep difficult policy decisions on how to raise more public money and avoid funding the bloc’s critical defence and energy priorities.
