Reform for a more effective Capital Markets Union is on the way

May 9, at the press conference with the new German Chancellor Friedrich Merz, the European Commission President Ursula von der Leyen, announced that a big push towards an effective Capital Markets Union is on the way. As the EU’s financial system has experienced a substantial growth and increased complexity in recent decades, yet it still lags behind the more market-oriented system of the United States. A recent report by the Centre for European Policy Studies (CEPS) highlights the challenges and opportunities for EU financial markets as they strive to stay competitive in a rapidly evolving global landscape.

Reform for a more effective Capital Markets Union is on the way

Key Developments and Challenges

The report, titled “Staying Ahead of the Curve: Shaping EU financial sector policy under von der Leyen II,” points out that the EU has made efforts to diversify and integrate its financial markets through initiatives like the Capital Markets Union (CMU) and the Banking Union. However, progress has been uneven, and several obstacles remain.

One of the main challenges is the fragmentation of the EU’s financial infrastructure. While the US has only two major stock exchanges, the EU has 27 national stock exchanges and a complex web of central securities depositories (CSDs) and central counterparty clearing houses (CCPs). This fragmentation hinders cross-border transactions and market efficiency.

Another issue is the low level of financial literacy among EU citizens. This may contribute to the preference for holding financial assets in cash and deposits rather than investing in capital markets, which in turn limits the growth of these markets.

Recommendations for the Future

The report offers several recommendations to address these challenges and enhance the competitiveness of EU financial markets:

Regulatory Simplification: The authors emphasize the need to simplify the EU’s complex financial rulebook. They argue that excessive regulation can stifle innovation and disproportionately burden smaller institutions.
Harmonization of Supervision: The report calls for greater harmonization of supervisory frameworks across Member States. This would help to create a more level playing field and reduce the costs of cross-border activities.
Capital Markets Union (CMU) Advancement: The report stresses the importance of deepening the CMU to foster market-based financing and reduce reliance on bank lending. This includes promoting long-term investment products and addressing barriers to retail investor participation.
Banking Union Completion: The report also highlights the need to complete the Banking Union, particularly by establishing a fully functional resolution framework and a European deposit insurance scheme.
Digital Finance: The growing importance of digital innovation in finance is acknowledged, with a call for a balanced regulatory approach that fosters innovation while managing risks.
Sustainable Finance: The report discusses the progress made in sustainable finance, including the development of green bonds and ESG (Environmental, Social, and Governance) standards. It emphasizes the need for better data availability and proportionality in these regulations.
Promote greater financial literacy: The report emphasizes the importance of financial literacy in encouraging investment in a wider range of financial products and contributing to the development of capital markets. It highlights the low levels of trust in financial advice and calls for improved financial education throughout life.

Conclusion

The report concludes that the EU financial markets have the potential to play a vital role in supporting economic growth and the green transition. However, to achieve this potential, policymakers must address the challenges of fragmentation, regulatory complexity, and uneven development.

Written by

LarsGoran Bostrom©

Author of the book “Psychology of stocks in the Digital Age”

European trends