One capital market for all?

The European Commission (EC) has embarked on a new project called the Capital Markets Union (CMU). Accordig to the EC, the CMU aims to create deeper and more integrated capital markets in the 28 Member States of the EU. With the CMU, the Commission ‘explores ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses’. This exercise is described by the EC as ‘a new frontier of Europe’s single market’.

Following a public consultation which ended on 13 May 2015. Today (8 June 2015) the EC organises a public hearing(opens in new window) on the subject. In response to the consultation, SOMO submitted a position paper on the plans which shares the widespread concerns about a Capital Markets Union (CMU). According to researcher Julian Müller the CMU is an ’ill-conceived project that creates financial risks without matching economic benefits. Its unstated goal seems to be to create new business for investment banks, rating agencies and the like and create a more market-based financial system in Europe’.

1) The Commission’s arguments for why CMU is necessary are unconvincing or based on flawed theoretical assumptions

The Commission claims that credit supply restrictions make it necessary to ease access to non-bank funding sources for non-financial businesses, especially for Small and Medium Enterprises (SMEs). However, it fails to provide empirical evidence for this claim. Moreover, it appears to adhere to a one-sidedly optimistic view of the functioning of capital markets. It has apparently failed to learn the lessons from the financial crisis, especially about the problems of systemic risk.

2) CMU is not about growth and investment! Its real goal seems to be the market-oriented restructuring of Europe’s financial system

The Commission claims that businesses do not invest because the mechanism of financial intermediation is broken. However, the main problem is a weakness of aggregate demand. In fact, the Commission’s own business surveys consistently show that demand, not financial constraints, is the main factor impeding non-financial businesses. Therefore we need policies that support domestic demand and complement the easing of monetary policy in the eurozone and other member states with fiscal policy stimuli.

3) Under current circumstances, expanding the share of capital market financing would create or exacerbate a number of risks

The Commission’s plans to stimulate the market for loan securitisations – the kind of instruments that played an important role in the 2008 financial crisis – raise concerns about systemic risk and financial stability. It thus risks undermining previous work undertaken to make finance more stable. Moreover, increasing reliance on capital market financing exposes the economy to the volatility and pro-cyclicality that characterises these markets.