CMU: Everything you always wanted to know but were afraid to ask

Anyone who has spent any time in the Brussels bubble recently will almost certainly have heard the Capital Markets Union buzzword floating around – indeed, Commission President Ursula von der Leyen has mentioned it repeatedly over the past few months.

For those unfamiliar with (or uninterested in) EU financial affairs, the term can be awe-inspiring – or, more likely, yawn-inducing. But what is it, exactly?

Is it the same thing as the Savings and Investment Union?

It depends on who you ask.

Sometimes, the CMU is indeed viewed as synonymous with the Savings and Investment Union: a phrase coined last year by Enrico Letta, a former Italian premier, in his high-level report on the future of the EU single market.

Although the new terminology is admittedly annoying, Letta’s term arguably does a far better job of capturing what the CMU is ultimately all about: namely, getting EU citizens’ savings to fund productive investments.

As France’s then Finance Minister Bruno Le Maire put it last year, “Europeans’ money is sleeping instead of working.” He added that roughly a third of Europeans’ savings lay dormant in commercial bank accounts – double the amount in the US.

Confusingly, however, policy wonks sometimes view the SIU as synonymous with the combination of the CMU and the Banking Union (BU): a related but distinct framework developed in the aftermath of the 2012 eurozone crisis to boost the resilience of Europe’s banking sector and break the sovereign-bank ‘doom loop’ (that is, the negative feedback effects between governments and banks that arise because of mutual exposure.)

As it stands, much more progress has been made on the BU than the CMU – just consider, for instance, the pretty revolutionary bank resolution framework set up under the former.

Isn’t there already a single market for capital?

In theory, yes. In practice, no.

The EU’s single market – which dates back to 1993 and lies at the heart of the European project – affirms the fundamental freedom of free movement for goods, services, people, and, yes, capital.

Although, on paper, capital is free to move around the EU’s 27 member states, numerous legislative, practical, and cultural barriers prevent this from actually happening.

This is why, in the midst of the eurozone crisis in 2014, then-Commission President Jean-Claude Juncker coined the CMU idea as a complement to the nascent Banking Union, which at the time was just two years old.

“Juncker did something which was a bit of PR,” said Nicolas Véron, a senior fellow at Bruegel and at the Peterson Institute for International Economics – namely, appealing to the apparent success of the Banking Union “to bring it to the next level with capital markets.”

Why are people talking about it so much?

For two reasons.

The first is that Europe has massive investment needs – and the CMU will help address them.

Mario Draghi, another former Italian premier, recently estimated that Europe must increase green, digital, and defence investments by €800 billion per year if its faltering economy is to remain competitive with China and the US.

The European Commission, meanwhile, has estimated that a “genuine” CMU would raise an additional €470 billion per year in private funds – in other words, more than half of Draghi’s projections for the bloc’s investment needs.

Some find both estimates questionable, however. In a report published last year, Finance Watch, a Brussels-based NGO, said that in a “best case” scenario, the CMU would raise between €300-600 billion per year. They also estimated that Europe’s investment needs to hover around a wide €800-1,600 billion range per year just for climate change mitigation and adaptation projects.

Regardless of who’s right, the basic point remains: a more integrated CMU would go a long way towards plugging Europe’s investment gap. Just how far it would go, exactly, is open to question.

Why can’t the public sector fund this?

This brings us to the second reason why CMU talks are currently ubiquitous: EU governments are largely politically unwilling – or economically unable – to cough up the money.

For one thing, many are already running debt or deficit levels that exceed the bloc’s limit of 60% and 3% of annual GDP, respectively.

For another, the EU’s €800 billion “NextGenerationEU” pandemic recovery fund, which is financed by common EU debt, will come to an end next year and is unlikely to be renewed owing to the resistance of ‘frugal’ member states, namely Germany and the Netherlands.

This, however, only partially explains the huge emphasis on getting the private sector to reinvigorate Europe’s economy: the bloc is also undergoing a political shift towards a much more pro-business and private-markets-centred policy agenda.

What has been achieved so far?

Very little – but not nothing.

Achievements, Véron pointed out, include the European Single Access Point, which centralises financial and non-financial public information about EU companies and investment products, and a “consolidated tape” that improves investors’ access to real-time financial markets data.

Philipp Lausberg, a senior analyst at the European Policy Centre, however, said that overall progress over the past decade “has been minuscule.”

Véron agreed that progress has been disappointing: “I would say the activity in terms of capital markets legislation has been not more intense than what it had been in another decade of your choice.”

Why has so little progress been made?

There are various reasons for this, but the main one can be stated quite succinctly: nationalism.

For instance, member states have so far staunchly resisted proposals to centralise financial market supervision, which some see as a ruse by France (where the EU’s financial markets watchdog, ESMA, is based) to gain greater control over their capital markets.

Or, to take another example, many EU countries’ legal sectors are vehemently resistant to Brussels’ attempt to harmonise insolvency laws across member states.

“The legal community tends to be very politically influential,” explained Véron. “When there is a reform that they really don’t like… they have the political clout to block it and that’s exactly what happens.”

The analyst believes that progress on insolvency law harmonisation would be “transformative” but unlikely to become politically feasible any time soon.

What can we expect going forward?

One CMU-related proposal that will certainly come up over the coming months is to ease securitisation rules, which has been explicitly mentioned as one of the top priorities of both the Commission and Poland, which currently holds the rotating Council presidency of the EU.

According to Véron, though, any securitisation reform will fail to be a game changer.

“Despite everything you may hear from bank lobbyists, there’s no credit shortage in Europe,” he said, adding “banks don’t have a problem of extending loans to good borrowers.”

Meanwhile, Véron suggested that centralising supervision remains a genuine possibility – especially if, as European Central Bank President Christine Lagarde has suggested, “close collaboration” is ensured between ESMA and national supervisory authorities.

“If you do a Venn diagram between what has a transformative impact and what is feasible, the only point of intersection [at] this point is supervisory integration,” he said.

Overall, Lausberg noted that immense obstacles lie ahead.

“Fully integrating the CMU will take a huge effort,” he said.

[AB]