The European Fund and Asset Management (Efama) Investment Management Forum, which took place on 23-24 November 2023 in Brussels, included a panel dedicated to the development of a capital markets union. During a discussion moderated by William Wright from the capital markets-focused think tank New Financial, Armel Castets, Paulina Dejmek Hack, and Esther Wandel talked about turning political support into concrete action and capital markets in the context of EU competitiveness.

More focus on competitiveness

Regarding the development of a , which aims to create a single market for capital and to get investments and savings flowing throughout the EU, “I do think a lot has been done,” began Dejmek Hack from the European Commission’s directorate-general for financial stability, financial services and capital markets union (Fisma). But there’s “still a lot to do.”

What is different in today’s conversations compared to a few years ago, is the increased focus on competitiveness and how capital markets can contribute to making the EU--and EU companies--more competitive, said Dejmek Hack. There’s also the need for financial markets to finance the green transition and the sustainability agenda.

EU still “lagging behind”

It’s important to recognise the progress that the European Commission has made to drive the CMU forward, said Efama’s Ingham. “We should not underestimate the cumulative effect of all those steps in developing--over the medium to long-term--capital markets.”

But after 10 years of “intense legislative work, I’m afraid that Europe is not yet where it needs to be. EU economies are still too dependent on bank financing, with capital markets remaining too fragmented and notoriously undersized,” particularly when compared to the US,” he added. The EU is “lagging behind” at a time of “generational challenges that will require huge financing: to decarbonise our economy, to build new industrial capacities to reduce our reliance on other parts of the world and to cope with an ageing population.”

“This is essentially why we need deeper, more liquid capital markets. Now.” This is, of course, easier said than done, added Ingham. So what are the priorities?

“Triple down” on boosting retail participation

Efama’s first recommendation would be that member states double--and even triple down--on their efforts to increase retail market participation in capital markets, said Ingham. “It can be a real game-changer. I think there is really untapped potential there. EU households have one of the highest saving rates in the world, with almost--by the end of last year--€14trn in cash or bank accounts.”

“So it’s quite a significant amount of money available. And if we were able to shift only just a few percent of that money from bank accounts to investments, this will make a considerable difference.” Not only will these investments help the economy, but they will also help the investors themselves by providing protection from inflation.

“Our second priority is about streamlining sustainable finance regulations that have been adopted over the last few years, with a view to ensuring overall consistency, reducing legal uncertainties and coming up with more investor-friendly disclosures,” said Ingham. This should help channel savings into sustainable projects.

His third point focused on competitiveness. “If you really want vibrant capital markets in Europe, it is essential to make sure that the EU remains an attractive place for investing or doing business.”

Member states also have role

Finally, it’s true that a lot has to be done at EU level. But member states also have a role to play by “using the levers they have at the domestic level, in terms of education, in terms of pension, in terms of taxation.”

“I think it is incredibly important that also member states engage in the process, on their level, with their specific needs, with their specific markets,” added Esther Wandel from the German finance ministry.

France and Germany, for instance, in September 2023 presented  for more integrated capital markets that could tackle social and economic problems. But these are “building blocks” and more needs to be done. “The CMU will not be built in Brussels,” Wright said, quoting John Berrigan, the European Commission’s director-general for Fisma. “It will only be built in the capital of every single one of the 27 member states.”

“Perfect is the enemy of good”

For Armel Castets from the French treasury, “there is a clear single priority, which is to get to deeper, more liquid capital markets within the union.” “We have no choice actually, because traditional banking lending is under pressure… and on the public-standing side, as we know, we’re quite constrained.”

“We need to focus on transformative action,” said Castets, and to avoid “politically sensitive” topics like pensions. “Our diagnosis is: we have massive savings in Europe… Do we really need the 27 [member states] to come into a room and have this conversation as a first topic on the CMU agenda?” There are other things that can be done that wouldn’t require long and drawn-out debates.

Pragmatism is also needed, noted Wandel. “Perfect is the enemy of good. We should really avoid that trap.”

Making it more concrete for citizens

“For the vast majority of the EU’s 450m citizens, capital markets, asset management, investment banking, stock exchanges are remote and abstract,” noted Wright. How could these be made more relevant to the citizen on the street?

Financial education is an important element, said Dejmek Hack. “Financial competence is not the answer to all questions, but I think  it’s an important element of CMU.”

Castets noted that it’s important to “learn from each other,” offering examples of exchanges on financial systems or digitalisation of assets with Swedish and Estonian colleagues.

“The primary responsibility of asset managers is to listen to their clients,” said Ingham. “As an industry, we can probably be more vocal about the role that our industry is playing in the entire ecosystem… we also have a role in engaging constructively, pragmatically, with policy-makers, with regulators,” in particular ahead of the upcoming European elections in June 2024.

If you ruled the world…

To close the panel, participants were asked: If you ruled the world, what would you implement in order to boost the capital markets union?

Auto-enrolment of pensions in every EU country and a single supervisor (Wright), a “pan-European savings product with harmonised taxation” across member states to fund European firms (Castet) and ways of putting savings in bank accounts to productive use in capital markets (Dejmek Hack) were a few of the answers.

Wandel replied that she would make the CMU more tangible for Europeans, “like Schengen or Erasmus.” This would be done by putting financial education on the curriculums of all schools and universities, allowing kids to learn about investing in a tangible manner.

Ingham would make financial education part of the programmes of all secondary schools in Europe “so that from a young age, people would understand the basic concepts of personal finance and see the value of managing a budget, saving and investing,” he said. “This would be an extremely powerful tool to empower citizens.”