Von der Leyen’s capital markets plan faces multiple hurdles

Ursula von der Leyen has pledged to build up the EU’s financial markets as she campaigns for a second term at the European Commission – but, after a decade of work, there’s still little consensus on how to do so.

Voters approaching the ballot box in June are likely to be more concerned about immigration, inflation and war than how to boost equity and bond markets.

But some argue a stronger capital market is the key to building up Europe’s competitiveness and autonomy, helping fund the green transition.

“Everybody has understood this is one of the main obstacles we have in the EU: access to capital,” von der Leyen said at an election debate last week (20 May).

The EU’s record here is indeed weak. At the end of 2023, US equities represented 45% of global market capitalisation; the EU just 11%, according to US securities industry group SIFMA. The EU effectively outsources around €300bn to US-based investment funds, von der Leyen pointed out.

Changing that – and creating more options for investors and cash-strapped companies – appears to be a goal shared by von der Leyen’s main rivals to be Commission president.

But the capital markets union first proposed by the European Commission in 2014 hasn’t yet materialised.

Political will

The project got harder with the loss of the bloc’s biggest financial market, London, and von der Leyen’s opponents accuse her of lacking the political will.

“You’ve been in charge for five years, and we haven’t seen a real push,” her rival Sandro Gozi, from the centrist Renew Europe group, said in last week’s Bruegel/FT debate, saying that recent political declaration by EU leaders is “too little, too late”.

Proponents point to some Brussels successes – such as unified rules for listed companies to produce a prospectus, and a new portal for information on potential investment targets.

But there have also been many failures. Much-hailed plans for a pan-European pension savings product got tangled up in red tape, and there’s only a single, tiny provider.

According to Valérie Urbain, Chief Executive Officer of financial infrastructure firm Euroclear, the choices will only get tougher.

“There is no more low-hanging fruit” to bolster capital markets, said Urbain, whose Brussels-based company acts as a clearinghouse and depositary for securities trades. “You really need to do some heavy lifting, which will require strong political will.”

For the top brass at Euronext – the pan-European group which runs stock exchanges in Paris, Milan Brussels, Amsterdam and Dublin – EU financial markets need central supervision, on the lines of the US Securities and Exchange Commission.

“The European SEC, that will happen … we will have a single supervisor,” Stéphane Boujnah, CEO of Euronext, told Euronews, while also calling for a relaxation of banks’ prudential restrictions on equity holdings, and of merger controls between financial service providers.

In a time dominated by Covid and the war, the capital markets project became a “political orphan”, Boujnah said – but he believes the US Inflation Reduction Act, offering massive green tech subsidies, could persuade decision makers to boost competitiveness.

Make European Equity Great Again

“We need to find a solution where the largest saving pool on the planet, which is the European one, is partially dedicated or driven towards the financing of European equity,” he said. “I call this initiative MEEGA, Make European Equity Great Again.”

Getting there will take more than Trump-like slogans.

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EU member states have previously rejected a centralised watchdog that could usurp their own national regulators.

ESMA wants them to reconsider, at least as concerns supervision of major, pan-European financial infrastructure.

“I would hope that also the co-legislators would be willing to look at this again in the light of the general willingness and push to move forward on European capital markets,” Verena Ross, ESMA’s chair, said last week.

The Paris-based agency also points to the need for consolidation in EU financial infrastructure – noting that the bloc has 27 securities depositaries, compared to just one in the leaner US market.

But that might be putting the cart before the horse, Urbain believes.

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“Having the best supervision but with no capital markets, no securities, we will not go that far,” she said, adding: “Work on the issuers and investors, then the rest follows.”

“Looking at financial market infrastructures I don’t think is necessarily the right angle,” Urbain said, adding that Euroclear has already integrated its operations as much as regulations permit.

Protectionism?

A further area of controversy is how much the new plans should involve foreign players from New York or London – or whether defending homegrown alternatives would amount to protectionism.

For Boujnah, Europe has been too naively welcoming – offering outsiders access that the the US doesn’t reciprocate.

“Europe has been for too long a continent of herbivores surrounded by carnivores; we have paid a heavy price,” Boujnah said.

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“No-one is suggesting to close Europe, because Europe is prosperous precisely because it is open to competition,” he said, adding: “You can call it European sovereignty, you can call it European strategic autonomy; We cannot be the only open bar in the planet.”

But Urbain appears to disagree – pointing out that financial markets rely on openness and stability.

“For the European markets to be successful, they need also to allow international investors to come,” she said, adding that she doesn’t want Europe to “fall into a closed circuit.”

She’s also troubled by a recent move to force Euroclear to surrender sanctioned assets from the Russian central bank, as EU ministers sought to make Moscow pay for the cost of Ukrainian defences.

“Given the systemic role of Euroclear, anything which would completely destabilize Euroclear is not good either for those financial markets,” she said. “If you start having a market with legal uncertainty you will start losing a lot more interest from global investors.”

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