What next for the EU’s capital markets union? by Jonathan Faull and Simon Gleeson
When the United Kingdom eventually leaves the European Union – assuming it does – it will take Europe’s biggest capital market with it. The loss of the City of London could drive the EU’s 27 remaining members to pursue an inward-looking strategy for managing their capital markets and keep London at arm’s length. Or it could convince the EU to open up its market to London and the rest of the world. In our recently published CER policy brief, ‘The capital markets union: Should the EU shut out the City of London?’, we argue that the EU should prioritise openness. The EU’s ambition to create an integrated capital market for cross-border investment within the EU, known as the capital markets union (CMU), began in 2014, long before Brexit. It is a laudable ambition, but progress has been slow. The integration of EU capital markets requires changes to many different areas of policy such as taxation, insolvency regimes and financial law and has proved politically tricky. With the UK’s imminent departure from the EU, the bloc is now bound to be without a globalscale capital market. But that does not mean it should abandon its ambition to build its CMU. After all, the fundamental issues that such a union is supposed to address endure. More deeply integrated capital markets would make the eurozone more stable, because cross-border capital markets allow the costs of economic shocks that affect one region or country to be borne by investors across the EU. European companies are also over-reliant on banks, which have been lending less and raising more capital
under pressure from regulators. Whether the EU likes it or not, European companies will be increasingly forced to source their financing from elsewhere; continental European capital markets are simply too small to meet the funding needs of its businesses. Going global does not come without challenges. While deeper global integration of European capital markets would increase European businesses’ access to international capital and potentially boost growth, it might also result in a loss of regulatory control, as both New York and London would be outside the EU’s jurisdiction. And such a potential loss of control is frightening for EU policy-makers. This fear has informed the EU’s approach to financial services and Brexit, where it has held a firm line: it stated that, unless the UK chooses to remain in the single market, British firms wishing to continue selling crossborder into the EU will be reliant on existing, narrow, equivalence provisions, which can be unilaterally revoked at short notice. The UK is not going to be considered a special case.