The Capital Markets Union (CMU) is a flagship initiative in the European Commission's agenda for financial services during the next five years. This "concept under construction" has already caused much debate as stakeholders attempt to define the CMU and set its primary aims and principles. However, the real debate is only just starting. The agenda will evolve rapidly over the coming months with a Commission consultation paper expected in Q1 2015 and a road map in Q3 2015.
To set the scene for the consultation paper, we focus on a stylised view of the CMU as an agenda to develop an integrated and fully developed single EU capital market to promote growth. The CMU will act as an 'umbrella' policy programme, covering existing as well as some new initiatives.
Old wine in new bottles?
The CMU is not a new idea, but the breadth and ambition of this latest iteration of the agenda is. At its heart is the idea of a single EU capital market providing alternatives to traditional bank finance, which currently dominates in the EU. This idea has been an aim of the EU since the 1966 Segre Report ('The Development of a European Capital Market') and it has featured in a number of policy agendas such as the 1999 Financial Services Action Plan. At its core sits the free movement of capital. The CMU represents the rebranding of this old idea and the next phase of integration and development.
To policymakers, while bank finance has a number of advantages (such as overcoming information asymmetries in the small and medium-sized enterprise (SME) market) as banks rearrange their balance sheets in response to market and regulatory pressures, stagnating growth in parts of the EU and high unemployment, alternative methods of raising finance are needed. A successful CMU could result in deeper pools of finance, lower costs of capital, increased SME and infrastructure finance, diversified avenues to raise capital, broader investment opportunities and increased financial stability.
Comparison with the Banking Union
The nomenclature adopted for the CMU and its similarity to the Banking Union naturally leads one to assume the foundations of the two agendas are the same. This assumption is wrong. The Banking Union and the CMU differ in two important ways:
The driver behind the Banking Union is to further financial stability while the driver for the CMU is to increase jobs, economic growth and develop a more resilient financial system. As a secondary driver the CMU aims to...