Covid 19 and Brexit provide fresh impetus for EU Capital Markets Union

Background

On 3 December 2020, the Council of the EU (the “Council”) approved a set of conclusions on the European Commission’s latest action plan (“CMU Action Plan”) on achieving an EU Capital Market Union (“CMU”).   Efforts to create a CMU have been ongoing since the Treaty of Rome came into effect more than 50 years ago.  The establishment of the Single Market, the introduction of the Euro and the enactment of the 2015 CMU Action Plan have all been incremental steps towards this goal. However, there remain some significant barriers to a fully functional CMU.  The High-Level Forum Interim Report published 20 February 2020 noted, “..  that capital markets in the 27 countries of the EU have become more integrated than in the past. However, they still do not function as one and their main centre, London, is now outside the EU,”.  This last factor is adding urgency to the desire of the Council and the EC to press forward with the CMU Action Plan[1].  Companies need to refinance themselves as they emerge from the recession caused by pandemic lockdowns.  In doing so many also need to reduce their reliance on bank finance. The EC is keen to expand and bolster its capital market to help reboot companies hit by the coronavirus and, post Brexit, to reduce the EU’s reliance on the City of London to provide non- bank finance to EU companies.

What is the CMU?

The CMU is the EU’s plan to create a truly single market for capital across the EU. The EU is known to have a strong banking system but hitherto has been largely reliant on the City of London to source alternative sources of finance or ‘capital’.  This was acceptable when the UK was a Member State but now that it has departed from the EU  it has created a vulnerability in the financing sector.  Whilst national capital markets remain small and fragmented, people and businesses will be locked out from the potential benefits of integration including a larger potential investment base . Fully functional and integrated capital markets will allow investment and savings to flow efficiently across the EU to the countries and projects that most need them.

The devastating impact of the Covid 19 pandemic on the EU economy has highlighted an urgent need to progress the development of the CMU.  In the immediate term the banking and public sectors have played a crucial role in providing liquidity to individuals and businesses hamstrung by the various Covid 19 ‘lockdowns’ that have taken place throughout 2020.  For many however, this is nothing more than a short- term fix. To remain solvent in the medium to long term and to increase general resilience to shocks many businesses, especially in the SME sector, require access to the ‘equity’ or ‘capital’ style funding which a CMU could provide.  However, currently many barriers to a CMU still exist in important areas such as taxation, insolvency and supervision. These render cross-border investment difficult and create confusion and uncertainty both for both businesses and potential financiers.  To overcome such barriers requires strong determination and political support.

Advantages of a CMU

It is important to recognize that the creation of a CMU is not the overriding objective, but rather, a means of helping the EU to deliver its key economic policy objectives namely:

1. Recovery from the pandemic
2. An inclusive, resilient economy that works for all Member States and citizens
3. Transition to a digital, sustainable economy
4. A strategically autonomous EU

Specifically, the CMU will:

1. Make funding more accessible for European companies. Removing barriers will allow them to readily access funds across the entire EU bloc.
2. Bring funding to investment projects across the EU more effectively.  Member States with strong growth potential but small capital markets will have easier access to funding. Citizens and businesses in more developed markets can access greater cross-border investment and saving opportunities
3. Increase the opportunity for citizens to save and invest on a long-term basis thereby helping them make financial provision for their old age
4. Introduce greater stability and resilience into the EU financial system.  Introducing a wider range of funding sources and more long- term investment opportunities will reduce the vulnerability of both businesses and citizens to banking shocks.

CMU Action Plan

The CMU Action Plan sets out 16 new action points which are designed to achieve the following three objectives:

1. Support a green, digital, inclusive and resilient economic recovery by making a variety of financing more accessible to European businesses and in particular SMEs via:
2. A single access point providing investors with access to financial and sustainability company information
3. Simplifying listing rules for public markets
4. Channeling more long- term finance to projects contributing to smart, sustainable, inclusive growth
5. Encouraging insurers and banks to invest in long-term assets
6. Assessing the merits of requiring lenders to direct failed applicants to alternative forms of finance
7. Support the provision of credit to companies via an improved securitization market
8. Make the EU a safe place for individuals to save and invest their funds on a long- term basis by:
9. Improving general financial literacy via a European financial competence framework and by incentivizing Member States to promote financial education
10. Taking steps to improve the quality of financial advice given to consumers in terms of clarity and ease of comparability
11. Helping Member States to improve pensions adequacy for their citizens
12. Integrate national capital markets into a fully functional single market via:
13. Simplifying withholding tax procedures to lower costs for cross-border investments
14. Fostering convergence of insolvency rules across Member States
15. Taking measures to improve the ability of cross-border shareholders to exercise their shareholder rights
16. Improving cross-border settlement services
17. Establishing a consolidated source of data about trading conditions across the EU
18. Strengthening the protection of investments
19. Enhancing the single rulebook for capital markets and foster progress towards supervisory convergence

The view of the Council

The Council’s 3 December 2020 conclusions on the CMU Action Plan are intended to provide political guidance for the EC in preparing future legislative and non-legislative initiatives relating to the plan.  They stress that, in the current climate, priority should be accorded to the above action points that:

1. Are important for improving the funding of SMEs and the economy in general.
2. Offer the most potential to deliver a swift economic recovery in the wake of the Covid 19 pandemic

The Council emphasizes that work on delivering these actions should be completed by the end of 2021 at the very latest. 

The Council conclusions also recognize that to create a fully functional CMU it is important to begin work on tackling the more complex time consuming barriers.  Those singled out for special attention are convergence of the outcomes of insolvency proceedings and, the evaluation of possible deficits in the rules on enforcement of financial reporting of listed companies

The outcome?

Sceptics may liken the EUs desire to achieve CMU to a search for the ‘Holy Grail’; a road paved with good intentions but strewn with barriers.  In many respects this is a fair assessment for a project that has been more than 50 years in the making.  Creating a true CMU requires time, effort, resources and, above all, unwavering political commitment from all Member States. Until now, the latter ingredient has been conspicuous by its absence.  However, according to Olaf Scholz, Germany’s Vice Chancellor, the Member States are now, “..sending a strong signal in support of accelerating the work towards a genuine Capital Markets Union”.[2]  If the EC can take advantage of the fallout from both the Covid 19 pandemic and Brexit and move quickly on its action points it may yet lay hands on the chalice that is the CMU.  However, it will need to follow through rapidly on the more complex issues as ‘political will’ is liable to start evaporating once the immediate economic crisis has passed.

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[1] Capital Markets Union Action Plan published 24 September 2020

[2] Council of the EU press release 864/20  04/12/2020