Policy Brief - The Political Economy of the Capital Markets Union

Executive Summary

The objective of creating a more integrated capital market in Europe is widely shared among academics, commentators, and even politicians. The process was launched in 2015, following the submission of the Five Presidents’ Report. 

The urgency has been reiterated recently in the report presented by Enrico Letta to the Heads of State and Government. 

The French and German Ministers of Finance signed a joint article in the Financial Times, calling to “close the EU capital markets gap”.

ECB President Christine Lagarde also advocated restarting the Capital Market Union (CMU) agenda.

Last April, the European Council asked the Council and the Commission to work “without delay on all identified measures that are necessary to create truly integrated European capital markets which are accessible to all citizens and businesses across the Union, to the benefit of all Member States.”

Over the years, little progress has been achieved. This paper examines the main factors underlying this failure, which are mainly of a political nature. 

They largely consist of not recognizing openly what are the main obstacles and the main driving forces opposing the realization of an integrated capital market in Europe. 

The main consequence of not achieving an integrated financial market is that Europe will not be able to finance the huge investment requirements needed for its ambitions in the fields of climate transition, energy security, digital evolution, defense, etc… Public funds will not be sufficient, given the deer state of national public finances. Bank financing is limited by banks’ capital requirements and profitability. Market financing is therefore essential. 

The other effect of non-CMU is on the competitiveness of the European economy. Without the support of an efficient financial system, European companies will find it more difficult to compete at the global level. They will have an incentive to move outside Europe, in particular to the US. 

European savers will have to pay more for financial products and have fewer choices for their portfolio diversification. Risk sharing in Europe will continue to be impaired. 

Further evidence of the costs of non-CMU is contained in the recent and forthcoming reports to the political leaders of the 27 member states. 

Will they be enough to convince the political leaders to stop focusing only on their respective local markets, which are slowly disappearing, and to start building a true European financial market? 

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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