The UK has flourished at the heart of the capital markets in Europe and beyond. But in a few months it may turn its back on the most ambitious project in a generation to encourage the much-needed growth of capital markets across the European Union.
Capital Markets Union (CMU) is a project launched by the European Commission in 2014 to help kickstart growth and job creation. It aims to reduce barriers to cross-border investment in the EU, reduce the European economy’s dependence on a struggling banking system and increase the range of available funding for companies.
If the UK votes to leave the EU, many people in the City of London fear that it would miss out on the benefits of CMU. At the same time, Brexit could derail the entire project: not only are the UK’s capital markets highly developed – relative to GDP, they are roughly twice the size of the rest of the EU’s – they are also tightly interconnected with Europe’s.
The potential gains are huge. Research by New Financial shows that if CMU helps reduce the wide dispersion in market depth across the EU, it could unlock trillions of euros of long-term capital (such as pension and insurance assets) that could be invested in European companies. It could enable businesses to raise hundreds of billions of euros in additional funding in the equity, bond and venture capital markets each year.
CMU is an ambitious programme of 33 different measures from rehabilitating the securitisation market to making it easier for smaller firms to access venture capital; from IPO funding to removing barriers to cross-border retail financial services and investment funds. But perhaps most significantly, it marks a shift in mindset among European policymakers.
After a blizzard of EU-wide regulatory reforms since the financial crisis, CMU is a recognition that capital markets are part of the solution instead of just being part of the problem. The initiative aims to remove major regulatory and legal barriers to the efficient functioning of markets, particularly across national borders. This in turn should increase competition and reduce costs for issuers, investment banks, investors and their customers.
Want more InFacts?
Click here to get the newsletter
The UK is in pole position to reap the benefits of CMU: already nearly 80% of EU capital markets and investment banking revenue is generated in the UK, according to research by Oliver Wyman. However, in the event of Brexit, it is unlikely that the UK would be able fully to capture the growth the project promises – if indeed it were to survive at all. Market participants talk of three different scenarios for CMU if the UK votes to leave, none of them particularly rosy.
First, the remaining members of the EU would accelerate CMU with a particular focus on faster and deeper integration of exchanges, clearing and the regulatory structure. This project would be more inward-looking and would increase barriers between the UK and capital markets in the rest of the EU.
Second, with the loss of the main driver of the initiative, UK Commissioner Lord Hill, CMU would cease to be a priority and gradually run out of steam. Or third, the project would grind to an abrupt halt. After all, many countries in the EU see CMU as an olive branch to the UK. With Britain’s departure, there will no longer be a need for inducements.
In short, CMU would become collateral damage from Brexit. The UK would lose influence over the future direction of the capital markets on its doorstep and would see its access to a growing market reduced. In turn, a vote to leave would lower the chances of CMU providing the tonic that the European economy so desperately needs.
William Wright is the founder and managing director of New Financial, a think tank and forum that makes the case for bigger and better capital markets in Europe www.newfinancial.eu
Edited by Alan Wheatley
Leave a Reply