The EU’s capital markets union: has it failed?

The contradictions in the European Union’s single financial market

In this paper, Piroska and Epstein, explore the complexities and challenges faced by the European Union (EU) in achieving a fully integrated single financial market following the 2008 US financial meltdown and subsequent Eurozone crisis. The authors argue that despite the EU’s introduction of new financial market initiatives aimed at advancing integration, stability, and shared prosperity among its members, such as the Banking Union (BU), Capital Markets Union (CMU), and the European Fund for Strategic Investments (EFSI), the design of these initiatives has inadvertently stalled further integration. In particular, Piroska and Epstein find that the institutional designs of BU, CMU, and EFSI have created tensions between the push for supranational oversight and the retention of national control. This has diminished incentives for full participation, especially among East Central European (ECE) members, due to structural differences between Eastern and Western Europe, such as levels of foreign bank ownership, depth of capital markets, and institutional capacity.

• Banking union’s contradictions: The lack of mutualized deposit insurance and national vetoes on the uses of resolution funds through the Single Resolution Mechanism (SRM), including the European Stability Mechanism (ESM), means that, sovereigns are still potentially fiscally responsible for failing banks headquartered in their markets. Where foreign bank ownership levels were high, as in ECE members, states are incentivized to maintain supervisory and regulatory control over banks, especially to keep resources within their economies particularly during the pandemic. As a result, ECE was not fully incentivized to participate in the Banking Union.
• Capital Markets Union and Eastern Capital Markets: The authors highlight CMU’s limited harmonization and national control, which have not significantly improved access to finance for Eastern European SMEs or addressed the shallowness of Eastern capital markets. With continued national supervision in all other segments of capital markets (pension, insurance, and investment funds) CMU codifies a fragmented European market. Fragmentation continues to present administrative burdens for potential cross-border investors, which tend to seek opportunities in the better capitalized Western capital markets.

Stalled by design: New paradoxes in the European Union’s single financial market
Authors: Dóra Piroska, Rachel A. Epstein
From: Central European University-Vienna, University of Denver

How to make progress with the CMU

In this commentary, Nicolas Véron argues that despite the high hopes and significant rhetoric surrounding the CMU, the project has made limited progress over the past decade. While the EU has implemented some useful capital markets legislation, such as the European Single Access Point for corporate disclosures, the consolidated tape of transactions data, and the European Long-Term Investment Funds, these efforts are viewed as consistent with the pace of regulatory harmonization seen before the CMU’s inception rather than transformative changes.

Is the CMU project doomed to fail? Possibly. But it can and should be given a last chance. Between the low-hanging fruit of marginal adjustment and the high-hanging ones of taxation, insolvency, and pensions, a mid-hanging fruit beckons that may not be out of reach: supervisory integration, namely the build-up of an authoritative EU capital markets supervisor – a “European SEC”, as ECB President Christine Lagarde called it, in reference to the powerful US Securities and Exchange Commission. This could catalyse the gradual dismantling of hidden barriers to cross-border market amalgamation.

European capital markets union: make it or break it
By: Nicolas Véron-Bruegel and Peterson Institute for International Economics