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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
An Online International Research Journal (ISSN: 2306-367X)
2016 Vol: 5 Issue: 1
1699 www.globalbizresearch.org
Capital Markets Union: Is the Eurosystem ready for it?
Sanjay Pawar,
Department of European Studies,
Manipal University,
Karnataka, India.
E-mail: sanjaypawar769@gmail.com
_____________________________________________________________________
Abstract
Europe has witnessed the worst financial crisis in recent years and now, it is struggling to
restore its economy on track. Most of the member states are burdened with sovereign debt and
the banks aren’t in a position to finance the economy. The whole idea of coming together for
economic growth and peace is being questioned. Meanwhile, the newly elected commission
announces to create the “Capital Markets Union” which would open up the non-bank financing
options for economy. But, is the Eurosystem really ready to take up this project? Even after
years of harmonization, fragmentation in financial market is a reality. The tax systems differ
from member state to member state. There are, unfortunately, barriers in extending financial
services to other member states. Moreover, the introduction of the Financial Transaction Tax
has magnified the differences in member states. Keeping aside all the challenges, it is evident
that Europe’s Capital market has a huge potential. This project could help in revamping the
Europe’s economy, and would give a kick start for further economic growth and development.
The aim of this paper is to find whether the Eurosystem is ready for taking up the ambitious
“Capital Markets Union” project. What are the current challenges to it and what changes are
required for making this announcement a reality have been discussed in this paper.
___________________________________________________________________________
Key Words: Capital markets, Eurosystem, Juncker Commission, Venture Capital,
Securitization
JEL Classification: G1, G2
Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
An Online International Research Journal (ISSN: 2306-367X)
2016 Vol: 5 Issue: 1
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1. Introduction
The Capital Markets Union (CMU) is an ambitious project and one of the major initiatives
of the newly elected commission headed by Jean-Claude Juncker. The aim is to create “an
integrated, well-regulated and liquid Capital Markets Union” (Hill, 2014) by 2019 with special
focus on increasing the public and private funding, to stimulate the financing options and to get
economies back on track for the longer term. However, the CMU remains an undefined term
so far. This is one of the biggest experiments in EU financial market to be carried out after the
banking union, which is still incomplete. To ensure an effective CMU the European Union must
study the present situation of the market and changes required in it. There is a significant scope
for harmonization in different areas, which needs to addressed, without which the CMU would
be just a great idea with poor implementation. This paper tries to figure out possible areas in
which changes are inevitable for the proper implementation and smooth functioning of the
CMU. The change would not take place overnight and hence called for a rigorous planning
beforehand. The ultimate goal of the CMU is to open up non-bank financing. This paper also
discusses about some possible non-bank financing options, its current situation in the EU and
changes required in it.
1.1 Objectives of the study
1. The primary objective of the study is to find main challenges before the CMU;
2. To figure out changes required in the current system to form the CMU; and
3. The advantages of having a bigger capital market for Europe.
2. Review of Literature
A moderate review of literature was conducted to understand the situation. Many reports
and EU announcements about the CMU as well as different reports published by research
agencies and think-tanks have been reviewed before putting pen to the paper. The first
announcement about the CMU was made in November 2014. All the announcements from the
EU and news pertaining to the CMU from leading news channels during the month of
November and December 2014 were covered.
2.1 Unlocking Europe’s Capital Markets Union (2014) – By Hugo Dixon
This paper by Hugo Dixon helps to understand the capital benefits of the CMU, if
accomplished. This gives a general overview of advantages which Europe could enjoy if the
CMU becomes a reality. The report also investigate in several non-bank finance options trying
to find solutions to challenges involved in it in current financial setting. It suggests development
of many financing options, which are well developed in the United States.
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2.2 Driving Growth: Making the Case for Bigger and Better Capital Markets in Europe
(2014) – By William Wright
The New Financial think-tank figures out the status-quo of the European capital market and the
United States in numbers. This report quantifies and compares the EU Capital Market with the
United States. It shows exactly how underdeveloped are European market. It also discusses
why Europe needs to work on a bigger and better capital market. Furthermore, the author
discusses and gives a helpful insight of the advantages of capital market over bank financing.
2.3 Defining Europe’s Capital Markets Union (2014) – By Nicolas Véron
The paper aims at finding main areas which could take place in the CMU agenda. The author
discussed the challenges before the CMU, in general. He also list out six main areas to be
included in the CMU agenda. 1. Regulation of specific market segments, 2.Review of
prudential frameworks, 3. Financial transparency, accounting and auditing, 4. Supervision of
financial infrastructure, 5. Insolvency and debt restructuring frameworks and 6. Taxation. It
covers several important areas which need to be on the CMU agenda, but the list isn’t complete.
There are other areas also which need to be included in agenda such as standardization of
regulations, challenges in private equity market and other non-bank financing options etcetera.
3. Research Methodology
Research approaches can be categorized in three different ways: exploratory, explanatory
and descriptive (Yin, 2003). An exploratory research is useful to clarify the understanding of a
topic or to see it with perspective which is done through the direct observation of a phenomenon
(Glaser & Strauss, 1967). Furthermore, Gummeson (2000) states this type of research is ideal
when there is a little information about the problem and it is difficult to define and determine
the problem and relations. A descriptive research is aimed at presenting a complete picture of
a phenomenon. It mainly involves obtaining information concerning status-quo of the
phenomenon. Lastly, an explanatory research method is used when many variables exist about
the topic under concern. The aim is to establish a cause-effect relationship by finding a
correlations between those variables.
The objective of this paper was to analyze and understand the newly announced CMU that
would help to understand the main challenges and key changes required. A descriptive research
approach has been used primarily, describing what CMU is all about and how current financial
setting in European Union states could pose challenges to this project.
3.1 Research Questions
1. What are the main challenges before the CMU?
2. What are the changes required in the current system to form the CMU?
3. What are the advantages of having a bigger capital market for Europe?
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3.2 Research design
Research methods are mainly divided in two categories i.e. qualitative and quantitative
methods (Malhotra, 1996). A quantitative method is a scientific, data-driven and outcome-
oriented research (Yin, 2003; Parasuraman, 1991). It emphasizes on statistical analysis of data
collected through polls, questionnaires, and surveys. On the other hand, a qualitative research
is an attempt to understand a phenomenon under consideration. It is an unstructured,
exploratory research method based on small samples (Malhotra, 1996). Keeping in mind the
objectives of the study, a qualitative study has been chosen to gain deeper understanding of
CMU and challenges before it.
4. Analysis of current EU capital markets
Firstly, the CMU should not be considered as an entirely new project. It is a continuation of
the existing financial market integration. It involves a wide range of initiatives to be taken in
various fields. The ultimate objective of the CMU is to achieve the founding principle of the
European Union i.e. free movement of capital across Europe. The efforts of the European Union
are to implement policies to develop an integrated capital market that can be traced back to the
Single European Act where it ensured the free movement of factors. More recently, initiatives
were taken in mid-2012 for centralizing the banking supervision and several other aspects of
banking and, thus, this created a Banking Union. Until these initiatives were taken, the
fragmentation in the banking supervision and policies were the prime obstacles of the integrated
and unified financial market of Europe. However, now it is important to concentrate on other
barriers of movement of capital, since the fragmentation in the banking policies is being
removed substantially. The establishment of the Single Resolution Board (SRB) and the Single
Resolution Fund (SRF), which is a part of the Banking Union, is underway. Jonathan Hill looks
optimistic about completing this task in the near future.
The major task involved in establishing the CMU is to find and encourage alternative
sources of finance for the businesses and investments, which would ultimately help to overcome
the sluggish growth of Europe’s economy. It should emphasize on the development of the non-
bank finance since the euro crisis left banks with a serious credit crunch and now they are
subject to stiff regulations. Banks are not in the position to finance the economic recovery on
their own. It is evident that the EU is too bank-centric; its non-financial corporate sector is
heavily dependent on financing that banks provide. Around 70 per cent of the debt financing
come from banks whereas only 30 per cent is financed by means of equity, public and private
bonds.1 Non-bank finance includes vast segments like Public and private equity, follow on
offering, venture capital, financing by shadow banks, securitizations, private placements, peer
1 As per “Funding the EU economy (English version)” report from Association for Financial
Markets in Europe published on 22nd July 2014
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to peer lending, hedge funds, corporate bond issues and so on which are relatively
underdeveloped in Europe. All of these do exist in the EU but compared to the US, the markets
are much smaller. According to the analysis of the New Financial think-tank, Europe’s capital
market has a huge potential to grow and currently it is roughly half of its potential size.2
This part of the paper envisages finding problems that holds the European capital market back.
We try to analyze each non-bank financial instruments that have the potential to unlock billions
of Euros and finance the real economy and the challenges faced in current situation. As
mentioned earlier, an efficient CMU cannot be created overnight, and it would take time to
address all minor rules and regulations that affect the flow of capital and to build the investors’
confidence in non-bank finance, which is traumatized after the crisis.
4.1 Reviving Securitization market and introducing High Quality Securitisation
“Time has come to revive a sound and safe securitization market in Europe,” said Jacques
de Larosiere, the President of EUROFI, the European Think Tank dedicated to financial
services.
Reviving the securitization market and introducing high quality securitization is a focal point
in Juncker’s plan. Securitization is one of the most important funding tool and a channel for
borrowers to ingress the capital market. A Corporate or banks can wrap up their receivables to
create a financial instrument, which can be sold in capital market. Fig: 1
Source: Association for Financial Markets in Europe (AFME). Report “Funding European Economy”
dated 22 July 2014.
At a time, when Europe is undergoing sluggish economic growth and the markets are having
trouble to raise finance, Securitization would play a vital role. Securitization can help banks to
clear up their balance sheets which would allow them to lend more thus making the much
needed credit available to the real economy.
2 “Driving growth: Making the case for bigger and better capital markets in Europe”, report
published by New Financial think-tank in September 2014. Size of capital market relative to GDP.
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The financial crisis has significantly affected the European securitization market, dropping
the annual issuance level to €80-90 billion (2013) from the €450 billion of pre-crisis years
(2005-2006) as per the report by AFME. The demand for securitized assets is slowly recovering
after the great recession of 2009. Despite its large potential; the securitization market remained
impaired in Europe. The securitization does not enjoy the same level of recognition as other
forms of debt instruments do. The lack of popularity and trust, negative experiences from crisis
and the complex and opaque structure of the securitization could be the reason behind
securitization market being underdeveloped. It is seen that, the complex and less transparent
subprime instruments have fanned the flames of the financial crisis especially in the US,
therefore it is of utmost important to design simple, transparent and sound ‘High quality’
securitization. The positive talk of the EU over the ‘High quality’ securitization should translate
into action so as to bring harmonized rules and practices in securitization market. The growth
of the securitization market is dependent upon supportive rules and regulations. In addition, the
rules of capital and liquidity requirements for banks and insurance companies would be a key
point. The solvency II directive for insurance companies, binds them to maintain a certain
amount of capital to lessen the risk of insolvency. The capital requirement for securitized
products is considerably higher than covered bonds, which discourages the investment in the
securitized products, which needs to be addressed by the European Union.
The payment and settlement system in Europe for both debt and equities remains inefficient
and fragmented. This regulatory challenge poses a threat to the development of the
securitization market and for the single market altogether. Particularly the smaller firms, who
have to pay a higher cost in adapting to different circumstances in the Member States. The
“Target2Securities”, an IT platform for settlement of securities on real-time basis, is fully
developed. It is expected to go online by June 2015.
Therefore, standardization of securitization, addressing the fragmented rules of insolvency
procedure (the later part of this paper shed light on problems in insolvency procedure) and
commissioning of “Target2Securities” are the three prerequisites for an efficient securitization
market.
4.2 Developing Peer to peer lending and Crowd-funding for Small and Medium
Enterprises
Peer to peer lending is an internet based platform where investors (Individuals and
businesses) can lend to companies, especially SMEs in need of capital. Most of the alternate
financing instruments in Europe are still in their babyhood, peer to peer lending is one of them.
In Crowd-funding, the investors receive their returns, in most cases, in terms of finished
products and not in monetary terms. The market is relatively small but has shown growth in
recent years. The UK and U.S peer to peer and crowd-funding market has shown a significant
growth. In the UK this sector is regulated by the Financial Conduct Authority after the request
Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
An Online International Research Journal (ISSN: 2306-367X)
2016 Vol: 5 Issue: 1
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from providers themselves, this would result in increased credibility, transparency and stability
in market. As per the European Federation of Finance House Associations (eurofinas) there is
no necessity for any action at the EU level for this market.3 However, the EU should look into
this type of financing options for SMEs to stimulate the growth across Europe.
The public’s confidence in internet based lending plays a vital role. In USA the investors
are accustomed with peer to peer services because it has been several years that such a market
exists there, however, in Europe people are relatively uncomfortable in making contracts and
lending money online. The US and UK have raised billions for SMEs and individual borrowers
through this innovative way of financing. Now, looking at peer to peer lending potential to
finance small and medium enterprises and individuals, some of the large banks in Europe are
considering entering into peer to peer business. It can further reduce the financing cost, and cost
to raise capital for SMEs.
4.3 Private Placement’s potential
In private placements, a company issues fixed interest bearing instrument directly to a set
of sophisticated investors rather than issuing it to the public. It is typically a long term financing
instrument, suitable for mid-sized companies who are in need of long term capital.
However, in Europe the market is small, except France and Germany which raised €15
billion in 2013. The US private placement market has 90% market share in global market. As
a result, many companies in Europe issue bonds in the US private placement market; they issued
around $15 billion in 2013. The UK private placement market is also underdeveloped and
companies in the UK look to the US market for private placement. The popularity of private
placement has gained momentum since the inception of the financial crisis. The encouraging
thing about this type of financing option is the low issuance cost since they are not subject to
registration with Securities and Exchange Commission. As stated by the International Capital
Market Association (ICMA), approximately bonds worth $50 billion are issued every year.
However, the European private placement market remained relatively little and
underdeveloped. There are numerous reasons for this, firstly the EU does not have institutions
specialised in private placement. The investors wouldn’t be able to make use of this type of
financing until institutions issue such debt and the companies are unenthusiastic to do so
because of absence of ready investors, and secondly, because of the regulatory differences
between the countries. The development in this sector is underway. ICMA is now actively
involved in the work of the pan-European private placement working group (PEPP WG) along
with AFME, ABI, EU PPA, EURO PP, LMA etc., which also includes representatives of major
institutional investors. The Banque de France and the Economic and Finance Ministry of UK
3 (Eurofinas, 2013), the summery of position of eurofinas on crowd funding.
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(HM Treasury) are the observers for this work. The main goal of this initiative by the ICMA is
to introduce common market practices for the Pan-European private placement market.
According to the ICMA’s report, approximately, 200,000 mid-sized companies in Europe
are looking for alternate sources of finance, as a result of bank deleveraging. Hence, the demand
would increase for private placement. Standard and Poor research indicates that mid-sized
companies would need €2.7 trillion of debt refinancing between 2014 and 2018. The real
European private placement market would not meet this level of demand, but it would play a
crucial role in raising substantial amount of long term finance.
4.4 Venture Capital: key for long term growth
The European venture capital showed some positive signs in the second quarter this year
raising $2.8 billion, which is the largest amount raised since 2001. Since the dot com boom
venture capital firms are finding it difficult to raise finance in the EU. In the same quarter, the
US venture capital market raised around $13.8 billion.4 These stats from Dow Jones Venture
Source show that the European Venture Capital market is relatively underdeveloped and small.
The US venture capital market is very active in financing start-up businesses, expansion
activities etc. In the EU, SMEs and start-up businesses find it challenging to raise capital, since
the investors are unenthusiastic about investing in a firm which has no assured returns.
According to New Financial think tank, “approximately 36,000 extra companies could have
been backed by venture capital firms in Europe between 2008 and 2013 if the Venture Capital
market were as deep as in the US” (Wright, 2014). One should understand that Europe is not a
bad place for entrepreneurship; it is the bad experience that the market had from dot com bubble
in 2001, which unfortunately posed challenges for the venture capital market to raise funds.
The European Venture capital market cannot match the US’s dynamic venture capital
market in the short run. But it can take several steps to revive this sector in order to close the
gap. At present, the regulation governing venture capital differs across member states and the
markets are fragmented by borders. Firstly, the Tax treatment of equity and debt should be
addressed which has contributed to the over-dependence on bank loans by SMEs and start-up
business. Most of the countries in Europe put double tax burden on equity capital. This, for
sure, discourages the investment in long run. Secondly, “Undertakings for Collective
Investment in Transferable Securities” (UCITS) are the EU’s main investment document which
demands to keep 90 per cent of the companies’ assets in securities which are listed. This means
that, this amount cannot be used for this illiquid form of investment but is vital from the point
of view of long term economic growth. The EU should push for a creation initiative of the
European Long-term Investment Funds (ELTIFs) which would allow investing in illiquid assets
like shares of unlisted companies, venture capital etc. This initiative is very important for one
4 Data from Dow Jones Venture Source
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simple reason, boosting long term investment in the economy which, at this time, is crucial for
Europe.
5. What are the possible changes required in current setting?
5.1 Addressing the obstacles of the Public and Private Equity
Unlike private equity, in the public equity market the companies become publically listed
and the shares can be bought and traded by public. The public equity market is usually highly
regulated. It is one of the most used and efficient nonbank financial instruments. Budget 2013
eliminated the stamp duty for the companies which are listed on AIM or any other growth
market. “Alternative Investment Market” (AIM) is a public equity market operated by the
London Stock Exchange, for growing businesses in the UK and Europe. The decision to abolish
the stamp duty would result in larger availability of finance. This shows that appropriate fiscal
measures to broaden the investor base for SMEs could be an effective way to increase access
to finance. The EU should take measures which would further simplify rules for the public
equity market and for Small and medium Enterprises. One such measure could be creating an
SME asset class to be included in the Markets in Financial Instruments Directive (MiFID).
The private equity remained, like other nonbank financial instruments in the EU, less
developed than the US. Private equity can play a crucial role in financing the SMEs, in the time
when these enterprises are facing difficulties to borrow from bank. Equity is considered to be a
healthier form of financing than debt. The enterprises would prefer equity over debt for couple
of reasons. Firstly, a company can have long term vision and planning of its opportunities if it
has equity finance. Secondly, in case the company suffers losses or downturn, the dividend
payment can be postponed unlike interest payments which are obligatory to pay on regular
basis. Furthermore, the equity finance, whether private or public, is not just good for Small and
Medium enterprises or any other individual companies for that matter, it is good for overall
economy since it facilitates risk sharing and adjust to shocks effectively. The types of Private
equity finances typically include, Angel investing, internet based instrument crowd funding,
investment in venture capital and leveraged buyout (LBO). All these types of private equity
mentioned above are relatively small and underdeveloped in the EU. Several reasons can be
pointed out in this context.
First of all, there is tax discrimination against equity. As mentioned earlier, in most of the
countries, not just only in the EU, the interest payments are deductible from profits before it is
taxed. Such benefits are not available for equity shareholders i.e. on dividends. The EU should
take necessary measures and introduce concrete policies which would remove this tax
discrimination against equity. This policy change would result in a great impact. But, the
European Union does not have the power to influence Member States to adjust or change their
tax system, especially the corporation tax. Nevertheless, it can encourage the member states to
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eliminate the current bias in tax on equity and debt. The commission has taken a step forward
in this context promising to give country specific recommendations as a part of the European
semester process, “in particular for member states with high debt bias in corporation taxation”5
5.2 Addressing the fragmented regulations
The CMU is, supposedly, intending to improve the flow of capital, but some upcoming
regulations would gum up the flow of capital. The member states remain divided with the
introduction of the Financial Transaction Tax (FTT) which is set to be implemented in 2016.
Through the enhanced cooperation between eleven member states led by Germany and France,
they have agreed to a tax of 0.1 per cent on share and bond transactions, and 0.01 per cent on
derivative transactions (Other member states include Austria, Belgium, Estonia, Greece, Italy,
Portugal, Slovakia and Spain).
This initiative of FTT by member states risked leading to further fragmentation in the EU
single market. The United Kingdom is opposing the introduction of Financial Transaction Tax
on the basis that it would impact the jobs, investment and pension funds and it should be
reconsidered before the implementation. Some exponents argue that the financial sector,
especially banks, had created a mess in liquidity and credit crunch and should pay more. But
the snag is that this tax would hit investors and companies more than the banks. This kind of
taxes could make Europe’s Capital Market a less attractive place to invest. The idea of the
Financial Transaction Tax is surely clashing with Juncker’s plan to deregulate the financial
sector. Other example of fragmented regulations in Member states is that the Non-bank
institutes can only offer credit in the state in which they are established. For lending in other
member states they must acquire a banking licence.6 Also, the bank levies are different across
member states, the EU must address this fragmented rates and take necessary measures to
harmonise it.
5.3 The key factor: Transparency
A free and good flow of information is the lifeblood for any capital market. The market
transparency is strongly associated with the easy access to market information, which is a must
for an efficient and effective capital market. The improved transparency and access to
information would significantly reduce the cost of raising the capital and the search cost. A
higher cost to access the information not only restrains the investment and competition but also
raises the cost of capital. The banks can evaluate the creditworthiness of their borrowers but the
non-bank investors find it difficult to do so and hence rely on public financial data. Hence, the
availability of pre-trade and post-trade information becomes essential for efficient and genuine
5 Long-term financing of the European Economy: “Communication from the commission to
the European Parliament and the Council”, March 27 2014. 6 Refer “Capital Idea”, news article by Hugo Dixon published on 21 July 2014.
http://www.breakingviews.com/hugo-dixon-what-is-eu-capital-markets-union?/21156455.article
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market for equities. So, what is required? Steps towards addressing this issue is already taken
with the introduction of Transparency “Directive 2004/109/EC” “Harmonisation of
transparency requirements in relation to information about issuers whose securities are admitted
to trading on a regulated market and amending the Directive 2001/34/EC”. Another significant
step taken in this area is the European Union’s decision to implement International Financial
Reporting Standards (IFRS) in 2002. But this does not apply to all the market participants since
only listed companies abide to follow this decision. The unlisted group which includes many
banks and other financial institutions use different accounting standards which results in
incomparable results and insufficient quality of data. Furthermore, auditing of IFRS reports
are done on national level. Almost every member states follow different set of rules of auditing
provided by national authorities. This further deteriorates the quality of reporting.
For the EU’s CMU, it is necessary to improve the flow of information in two key areas the
infrastructure finance and the small and medium-sized enterprises (SMEs). According to the
report by Finance ministers of the European Union last year, these two areas lack in
transparency. The EU should take necessary actions to enhance the transparency in the market
and particularly in aforementioned sectors. In order to attract more capital in the public
infrastructure projects, the EU should publish the past performance reports which would help
the investors to take decision about investing in future public projects. The “Report of the High
Level Expert Group on SME and Infrastructure Financing – Finance for growth” recommended
that the EU needs to have a credit risk performance database which would bring the SMEs
closer to the capital markets.
5.4 Standardisation
No investor would like to deal with 28 separate standards. The European Union is working
hard on streamlining the financial regulations but the work is still in progress. The biggest
concern in this context is the fragmented insolvency procedures across Europe. The annual
“Doing Business” report, released by the World Bank, ranked 189 countries by their
attractiveness to do business. The data shed light on the time taken to resolve the insolvency
issues, commercial disputes and winding up of a company. It is evident that investors prefer
countries where above-mentioned things are easy and quick to do.
According to the World Bank’s Annual Report “Doing Business” 29th October 2014, in
Southern Europe these procedures are much slower than in countries like France and Germany,
which partially explains why these countries failed to draw in new investment. The other
reasons could be historical and cultural legacies, deep rooted special interests, protection to the
government linked creditors, and inefficiency of insolvency courts. The European Insolvency
Regulation which is in effect from May 2002 intends to promote the co-operation between
different insolvency regimes of the Member States within the EU.
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It is high time that the EU must come up with some concrete measures to harmonise the
national insolvency rules and cross border insolvency settlement procedure. But full
harmonisation is not a realistic target due to severe differences in insolvency legislation and
constitutional arrangements. The European Commission is likely to come up with new rules on
harmonising the insolvency procedure across all the member states next year. But, the
imperviousness to change of some judicial systems will be the major concern for the EC. If the
European Union somehow manages to address this issue, a harmonised insolvency procedure
would be a big step towards the CMU and would give a finishing touch to the Banking Union.
A truly integrated and regulated CMU can possibly invigorate the EU’s economy and help them
to discard the sluggish growth.
6. Benefits of CMU for the EU
6.1 Alternative financing option for the Economy
The CMU would work as an alternative financing option for EU’s economy. As per the
European Commission’s agenda for Europe 2020, 1 trillion Euros are required for investment
in telecom, infrastructure, and energy and transport (The European Commission, 2014). Banks
alone cannot finance this ambitious project, more of non-bank finance is essential to take up
this responsibility. As discussed above, lots of possible alternatives to finance the economy are
available.
6.2 Competitive financing options for SMEs
The Small and Medium Enterprises confront troubles in raising funds as a result of limited
choice of funding options. A handful of lenders have the majority of market share in some of
the Member States. This is EU’s one of the major problems, its financial system is not as
competitive as it ought to be. On top of this, the credit is usually provided to companies or
borrowers having incestuous relationships with banks. The introduction of the CMU would
surely help the Small and Medium-sized enterprises by making the financial system more
competitive.
6.3 Sharing negative shocks
The balance sheet of the government, particularly in Ireland and Spain, was weighed down
by the failing banks, which added huge liabilities to it. In contrast, the failure of the sovereign
threatened the major national banks in Greece. The interaction of stressful sovereign and
troubled banks somehow needs to be addressed, since the banks are failing to absorb the
negative shocks. The bank-centricity of Europe exacerbated the crisis. The banks are more
vulnerable to runs because they mostly depend on short-term deposits. At the point when the
banks confront challenges, the government needs to safeguard them to secure the depositors.
However, in some cases, particularly in Ireland, it proved to be a disaster for the government
too. On the other hand, the Capital markets particularly deals in long term funding and hence
Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
An Online International Research Journal (ISSN: 2306-367X)
2016 Vol: 5 Issue: 1
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is well prepared to take the hit. If an equity-financed company runs into trouble, it can revise
its business plans and it would not affect the banking system largely. Hence, the economy is
less vulnerable to runs if the risk is really being handed over to the institutions, that are not
being profoundly leveraged themselves, and to those institutions that deal in long term funding
and do not depend upon transient money.
A well-developed capital market would help the European Central Bank to manage the
inflation in future. How? At a point when the ECB opts for Quantitative Easing, it has very low
range of capital market instruments. The CMU would bring a wider range of financial
instruments wherein the ECB can sell or buy in order to manage the money supply in the
market.
One should remember that creating a CMU is only one part of Jonathan Hill’s portfolio. If
the banking or financial crisis erupts in the near future, this ambitious project is expected to be
kept on hold. Also, the Eurosceptic UK government wing is not keen on the idea of the CMU
as it sees this project as an attempt of the European Union to seize power from them. David
Cameron, provided he wins the general election of 2015, plans to have a referendum on exiting
the EU in 2017. The US-owned financial institutions such as Bank of America, Citigroup and
Morgan Stanley are considering exiting from the UK if “Brexit”7 takes place. The CMU is a
good reason for the UK to stay back in the European Union. The city of London wouldn’t like
to miss on the opportunity to join the capital market. The potential of capital market will
diminish, to a great extent, if the city of London is out of it.
7. Conclusion
Is the Eurosystem ready for all the challenges? In the current setting of financial system it
is hard to say “Yes”. However, one should not presume the success or the failure of the CMU
based on a few of announcements from the EU. The project has all the potential to stimulate
the European economy. A lot is dependent on the action plans to be presented in the summer
of 2015 by Jonathan Hill and the willingness of the member states to welcome the reforms.
Europe will hit the jackpot with the creation of a genuine CMU. But, harmonising the tax
system, insolvency procedures and bankruptcy laws is not a piece of cake. The Juncker
commission shall at least place concrete founding stones by 2019 if not a fully integrated capital
market. Europe should utilize this opportunity to achieve the goal for which they came together,
economic prosperity of Europe as whole. It is not worth letting such a historic crisis go to waste.
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