Comment: Planning Europe's Capital Markets Union

Lavan Thasarathakumar, regulatory policy at British Private Equity & Venture Capital Association (BVCA), discusses the potential impact of the planned Capital Markets Union in Europe.

On 18 February 2015 the European Commission launched a Green Paper setting out its initial thoughts on how to create a Capital Markets Union (CMU). This, alongside the new Investment Plan for Europe, pioneered by Commission President Jean-Claude Juncker, represents one of the two key planks upon which the EU is hoping to build strong, sustainable economic growth in the future.

Led by the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, the UK’s Lord Jonathan Hill, this CMU initiative seeks to unleash the potential of Europe’s capital markets. This in turn will help engender financial stability.

The BVCA, via its sister association the Brussels-based EVCA, provided feedback to the European Commission following the release of the Green Paper. Here, the industry welcomed the approach put forward by the EU executive, specifically with regards to boosting the availability of equity finance for small and medium-sized enterprises (SMEs). Given that the BVCA’s private equity (PE) and venture capital (VC) members invested around £4.1bn ($6bn) into 710 domestic companies during 2013, 86% of which were SMEs, it is clear that the asset class can play a large part in helping the Commission meet its goals. This is, of course, dependant on legislators striking the right balance between supporting effective supervision and competitive markets.

Legislative progress has been encouraging in this regard. On April 25, the ECOFIN (Economic and Financial Affairs Council) committee of the EU’s Council of Ministers, at the time under the leadership of the Latvian Presidency, stated the importance of SMEs and that they should be given the opportunity to attract investors across all EU member states. Drawing reference to the US, the ECOFIN committee added that US medium sized companies receive five times more funding via capital markets than EU medium sized companies. The ethos is that only through encouraging investors to allocate to competitive products and businesses can the EU re-establish itself on the path towards economic growth. This ties in with the view held by the European Parliament.

An important factor that needs to be taken from both the Council and Parliament’s respective standpoints is that a CMU should not seek to make bank finance redundant. Having identified Europe’s overreliance on this form of investment, the initiative must aim to encourage an equity culture that works in unison with the availability of bank debt. The over-reliance on bank financing has seen Europe struggle more than the US to bounce back from the financial crisis. This being said, the Parliament is conscious that Europe should not just follow suit. A CMU should also consider the deficiencies in the US model and learn from them.

The next step in the process will see an action plan put forward by the Commission during the autumn. Here, the details of any forthcoming primary legislation will be published. It is also clear that there will have to be a review of a number of legislative files to support the goals of establishing a CMU. However, the Commission is cognisant of the fact that this should not solely be a “top-down” initiative, and stresses the necessity of market-driven innovation playing a key part in facilitating progress.

A genuine CMU would also seek to address more deep-seated issues, such as the the heterogeneity of insolvency laws that exist between different Member States. This will inevitably take time as policy areas such as this fall within the remit of national competences so achieving a consensus at EU level may prove challenging.

Nevertheless, the initial discussions within the European institutions have proved encouraging. The recommendation from the Parliament to accelerate the delivery of a CMU to the end of 2018 illustrates the political momentum behind the project. However, the BVCA remains aware of the challenges that must be overcome before a CMU is established, so will remain engaged in this debate every step of the way as it develops.

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