The capital markets union (CMU), which is meant to get capital “flowing” across the European Union to benefit people throughout the bloc, was the focus of a webinar organised by Luxembourg for Finance. On the right is Pablo Portugal, managing director at the Association for Financial Markets in Europe, who gave the keynote speech. Photo: Shutterstock/Provided by AFME. Montage: Maison Moderne

The capital markets union (CMU), which is meant to get capital “flowing” across the European Union to benefit people throughout the bloc, was the focus of a webinar organised by Luxembourg for Finance. On the right is Pablo Portugal, managing director at the Association for Financial Markets in Europe, who gave the keynote speech. Photo: Shutterstock/Provided by AFME. Montage: Maison Moderne

Luxembourg for Finance organised a webinar on 11 May that focused on the capital markets union in the EU. Capital markets will need to play an increasingly significant role in the EU’s economy in the years to come, said Pablo Portugal, managing director at the Association for Financial Markets in Europe.

The capital markets union (CMU) is an initiative that was launched by the European Commission in 2015 that aims to create a single capital market to better serve consumers, investors and companies, explained Inès Buttet, adviser in policy and regulatory affairs at Luxembourg for Finance. According to the , the CMU is meant to get capital “flowing” across the European Union to benefit people throughout the bloc, no matter where they’re located.

“The overarching goals of the capital markets union is to provide greater sources of financing at a lower cost, to provide financing to small and medium enterprises, to create new opportunities of investment to investors, to help Europe deliver on its green deal and its digital agenda--which are cornerstone--and to reinforce the competitiveness of the EU bloc,” said Buttet in her introduction to the webinar.

There are four “building blocks”: greater sources of financing, heightened efficiency of capital markets, an increase in attractiveness of the EU to investors, and a strengthening and harmonisation of supervision at the EU level.

But the CMU is more than “an initiative that was triggered by crisis management challenges” in the aftermath of the 2008 global financial crisis, said Buttet. “It’s more than that. It’s a long term agenda. It’s a long term initiative.”

Is the CMU still relevant?

Pablo Portugal’s answer to this question was “a resounding yes.” Portugal, managing director, advocacy at the Association for Financial Markets in Europe (AFME), delivered the keynote speech at the webinar, during which he argued that Europe needs “deep capital markets” to drive its green and digital transformations.

“Capital markets will need to play an increasingly important role in the EU economy in the coming years and decades,” said Portugal, citing three main reasons. “The first one is that it is clear that the enormous investment needs associated with the transition to a more sustainable economy and the challenges and opportunities of digitalisation cannot be funded solely through government support programmes or the provision of bank loans.”

We need deep capital markets to be able to mobilise the use of significant savings pools and private resources to enable the green and digital transformation
Pablo Portugal

Pablo Portugalmanaging director, advocacyAssociation for Financial Markets in Europe

“We need deep capital markets to be able to mobilise the use of significant savings pools and private resources to enable the green and digital transformation,” said Portugal.

Boosting competitiveness and ensuring financial stability

The second point relates to competitiveness. “Strong capital markets are increasingly vital to strengthening the EU’s competitiveness and prospects for economic growth and job creation in a global landscape,” he said. “Risk capital is needed to finance technological innovation, and the many businesses in Europe with high growth potential that can expand rapidly and generate the jobs of the future.” It is key to direct capital into these businesses. But it’s also important for households to have investment opportunities that will permit them to save for retirement.

Portugal’s third reason in support of the capital markets union concerned financial stability. “The various developments that we have seen in the last few years have underscored why the EU needs a strong and resilient financial system that is able to withstand sudden economic shocks,” he said. Deep capital markets can be a “shock absorber” and strengthen the overall stability of the financial system.

EU must do more to fulfil CMU objectives

The EU is a global leader when it comes to sustainable finance and the issuance of green bonds, and Portugal highlighted the fact that Luxembourg is among the “leading member states in that space as well.” Fintech has also grown in recent years, and more EU countries are offering “regulatory sandboxes” in order to facilitate innovation.

The capacity of EU capital markets remains undersized, especially when compared to the size of the EU economy
Pablo Portugal

Pablo Portugalmanaging director, advocacyAssociation for Financial Markets in Europe

But despite these achievements, “the capacity of EU capital markets remains undersized, especially when compared to the size of the EU economy, and, for example, the United States, which has much larger capital markets.”

There must be a “real political commitment to expand the size and capacity of EU markets at all levels,” argued Portugal.

“Need to ensure that securitisation functions properly”

Portugal also highlighted the importance of securitisation in his keynote. This is when credit institutions and sell them to investors, allowing banks to use capital to cover the risk in those loans to provide new loans, as explained by the European Commission.

The EU is a bank-centric economy, Portugal said. Though “we certainly want to see more equity finance,” for the “bulk of SMEs, funding will continue to come in the form of bank loans.”

The ambition to scale up the securitisation market in Europe has not yet materialised
Pablo Portugal

Pablo Portugalmanaging director, advocacyAssociation for Financial Markets in Europe

“We need to ensure that securitisation functions properly as a mechanism, providing that crucial link between bank finance and the capital markets,” said Portugal. “I think this is one of the most pressing aspects of the CMU agenda, as a well functioning securitisation market is an essential tool to transfer credit risk away from the banking sector to markets and to recycle capital into new lending to support SMEs and corporates.”

Securitisation can therefore play a role in the green transition by ensuring that banks can provide the loans that businesses and households will need to meet the Paris agreement requirements. “Yet the ambition to scale up the securitisation market in Europe has not yet materialised. It’s fair to say that the market remains subdued, and, I would say, vastly below its potential.” Portugal thought that it would be necessary to revise the regulatory framework--both on the supply and demand side--in order to improve this situation.

Promoting equity finance

“The EU has an equity gap when compared to some global peers,” said Portugal. “We need to work on measures that strengthen Europe’s primary markets, but also the secondary markets ecosystem.”  It will also be necessary to enact reforms and supporting high-growth businesses that can boost economic growth and job creation.

We need to get the balance right between providing more flexibility to issuers and reducing costs
Pablo Portugal

Pablo Portugalmanaging director, advocacyAssociation for Financial Markets in Europe

Examples includes the possibility to use “multiple-vote share structures across the EU,” he said. “However, we need to get the balance right between providing more flexibility to issuers and reducing costs, while at the same time, maintaining adequate levels of legal certainty, transparency and investor protection. That balance is really crucial.”

Secondary markets will also need to be made more attractive, as this will bring in investors and companies to EU markets, said Portugal.

Financial markets are interconnected and competing

Financial markets do not work in isolation, concluded Portgual. They are “interconnected” and “effectively competing with each other.” Therefore, the EU needs to ensure that its regulatory frameworks support financial stability, protect investors and remain competitive in order to grow capital markets in Europe and attract international players.

We need to make sure that each step is as ambitious as possible
Pablo Portugal

Pablo Portugalmanaging director, advocacyAssociation for Financial Markets in Europe

The CMU is a long-term project that requires work not just at the EU level, but also at the level of individual EU members states, said Portugal. “Progress is always going to be incremental. We need to make sure that each step is as ambitious as possible and that the outcomes are meaningful in terms of advancing the CMU objectives.”

EU must learn the right lessons

In a on 15 May, Luxembourg’s finance minister (DP) and Poland’s finance minister Magdalena Rzeczkowska highlighted the expertise of national competent authorities to channel investments into the green and digital transitions, and argued that “a successful CMU also requires capital markets that are open, within the EU as well as towards global markets.”

The capital markets union will boost competitiveness in the EU, while closely interconnected financial hubs will ensure that EU companies can get the funding that they need, concluded the two finance ministers.

Watch the replay of the “Focus on Capital Markets Union” webinar .