The lack of integrated capital markets in the EU is holding back innovation and productivity growth. Despite a renewed push by the European Commission, significant operational barriers to CMU persist. Factors such as incomplete banking union and political disagreements create further headwinds. A single EU financial market remains far off; innovative workarounds could create a catalyst for progress, Standard Chartered’s economists Christopher Graham and Saabir Salad report.
EU capital markets fragmented along national lines
“EU capital markets remain fragmented along national lines, creating a key barrier to innovation and productivity growth. There has been a renewed push by the European Commission to complete capital markets integration, including the announcement of the Savings and Investments Union (SIU) strategy last year, the primary aim of which is to create “a financing ecosystem to benefit investments in the EU’s strategic objectives” by connecting “savings with productive investments”. We take it as a given that the creation of a single, unified financial market would offer significant benefits to the European economy, including lower capital costs, reduced reliance on bank funding, increased cross-border financial flows and stronger innovation. We aim to identify the conditions necessary both for progress towards capital markets union (CMU) and for capital markets to be fully effective.”
“Despite successes in recent years, the goals of CMU and the SIU remain a long way off. Technical and regulatory barriers need to be overcome to make further progress on integrating EU capital markets. These include the lack of a single supervisory authority, and the need to harmonise the post-trading environment, tax and insolvency regimes across countries. While any headway on these fronts would be encouraging, broader dynamics will continue to constrain the effectiveness of CMU, including the varying depths of individual countries’ capital markets, the underdevelopment of pension systems, an incomplete banking union and single market, as well as political challenges. Workarounds are being explored, centred around ‘coalitions of the willing’ pursuing progress separate to the EU-27, but these efforts are in their early stages and carry their own risks.”
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