In response to the IRA, the EU should accelerate the capital markets union

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The Commission had already presented an action plan in 2015 to gradually turn the 27 markets into a single market.

(Photo: dpa)

How should the EU react to the massive US green technology subsidy package? The question will gain momentum this week when the Brussels Commission presents a first proposal on Wednesday.

In a guest article in the “Financial Times”, the three Vice-Commissioners Margrethe Vestager, Valdis Dombrovskis and Frans Timmermans have already set an emphasis that has so far been overlooked in the debate.

They point out that instead of subsidies, the EU urgently needs private investment in order to be able to keep up in the race for the key technologies of the future. The trio therefore recommends pushing ahead with the capital markets union.

The idea is correct: an EU-wide capital market would not only be more attractive for international companies and investors. For example, German investors could also benefit from the growth of Latvian software companies, while Italian savers could finance the expansion of German wind power.

The problem: The capital markets union is similar to the reduction in bureaucracy. It is often called for in Sunday speeches and position papers by ministries. However, when it comes to implementation, there are always many reasons why this or that does not work.

More precisely, there are 27 reasons. Because there are so many national capital markets in the EU. Governments, supervisors, associations and companies vehemently defend national acquis on the subject.

Reforms seem piecemeal

So it is no wonder that the European capital markets are underdeveloped in international comparison. According to a study by the think tank New Financial, 75 percent of European companies are still financed through bank loans. Only a quarter of the financing requirement is covered by bonds on the capital market. In the US, the relationship between loans and bonds is reversed.

The author

Carsten Volkery is a Handelsblatt correspondent in Brussels.

(Photo: Klawe Rzeczy)

The Commission therefore presented an action plan back in 2015 to gradually turn the 27 markets into a single market. However, integration is progressing very slowly. Most recently, EU Finance Commissioner Mairead McGuinness presented three legislative proposals in December to harmonize insolvency law, i.e. to align all rules, make IPOs easier and attract more euro clearing deals from London to the EU. A clearing house stands between buyer and seller and handles securities transactions.

All three reforms are important building blocks of a capital markets union. At the moment, the length of insolvency proceedings varies from seven months to seven years, depending on the country. This uncertainty deters investors. Harmonization is therefore urgently needed.

It is also long overdue that the Commission wants to facilitate IPOs. In this way, European founders may be prevented from going public in the USA in the future. Building functioning clearing markets is also important.

>> Read here: Clearing, IPOs, insolvency law – the EU wants to strengthen the capital markets with three reforms

And yet these reforms seem piecemeal. Because the basic structures of the national capital markets will not be shaken. Venture capitalists often only work in their own country and have little knowledge of companies in neighboring countries.

Exchange operators are fighting against central databases that make current information from all over Europe accessible to investors. Governments oppose a uniform withholding tax on capital gains. National financial regulators defend their sphere of influence. The list could be continued endlessly.

As early as 2020, an EU working group headed by Thomas Wieser came to the conclusion that the capital markets union was “more urgent than ever”. But a new “European speed” on the subject is still missing today. The banking union failed only last year due to resistance from the German savings banks. That’s why it always seems a little perplexed when politicians call for the capital markets union to be accelerated.

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