EU capital union drive must confront taboos on tax, oversight and insolvency
2 October 2018. By John Rega.
Jean-Claude Juncker’s proposal for an EU capital market union was greeted in 2014 by financiers with enthusiasm but uncertainty.
Wim Mijs, European Banking Federation chief executive, encapsulated the reaction this way: “Everybody loves it because nobody knows what it is.”
Four years later, industry and some public figures understand the program, yet remain underwhelmed with its payoff in terms of money for business.
Jeroen Dijsselbloem, who chaired talks between governments on some CMU proposals when he was Dutch finance minister, acknowledged last week that policymakers came up short.
“It never really came off the ground as a big project,” he told a conference* in Brussels.
Dijsselbloem, who pushed for faster action in areas including green bonds, called for Juncker’s successor at the helm of the European Commission — to be appointed next year — to go further, toward a more integrated market for companies raising capital around the region. “We need it badly,” he said.
— Going backwards —
The EU has notched some modest growth in risk-capital pools and other areas, a coalition of industry groups including the Association for Financial Markets in Europe said in a report on the CMU last week (see here).
But the bloc has backtracked on other key metrics of building up funding from investors.
Financiers have long said that banks provide 75 to 80 percent of corporate finance in Europe, while American companies get a similar proportion of their capital from markets. Instead of improving the balance, the EU has grown even more reliant on banks, reaching 86 percent of funding as of last year, according to the AFME-led report.
No one promised a revolution in four years, yet even the small-bore measures of the CMU hit unexpected obstacles.
Jonathan Hill, the EU commissioner initially tasked by Juncker with carrying out the plan, called for starting with “quick wins” to build momentum. His first steps included streamlined rules for the prospectuses used to market securities offerings, and legislation to rehabilitate a simplified form of securitizations to finance lending.
Some lawmakers voiced unease about potentially loosening investor protections, however, taking a year to agree on the prospectus revamp.
Others sought to bury securitization rather than revive it, after American structured finance set off the global financial crisis last decade. Hill’s September 2015 proposal took almost two years to enact, and is set to finally take effect in January 2019. Meanwhile, loan transfers to investors — of which securitization is one channel — in the US have rebounded to levels greater than in 2008, while Europe’s have not, according to the AFME-led coalition.
— Shifting power —
Potentially further-reaching initiatives proposed later, such as unleashing pension investments and centralizing some financial supervision, have stumbled on more fundamental concerns about shifting national powers to EU authorities.
EU-wide personal pensions will need tax breaks to attract investors, according to asset managers and some lawmakers (see the case file here).
But the bill to create them only recommends beneficial fiscal treatment. A binding mandate would need unanimous agreement among the 28 countries, which tend to protect domestic products. Ideas in the CMU to address other taxes on investors have so far stuck with studies rather than sweeping legislation.
“Withholding taxes continue to be one of the most prominent impediments to cross-border integration,” AFME, the industry group, said in its report.
Market proponents have also suggested that more centralized oversight could break down business borders within the region. AFME and other investor groups are calling for streamlined bankruptcy practices as well, to help confidence when buying bonds, distressed credit or other assets.
Those areas have so far run into national sensitivities.
Legislators are upholding domestic supervision in areas such as benchmark indexes and financial data vendors. Fund markets remain fragmented by divergent demands from regulators even when applying harmonized rules.
Meanwhile, several countries have revamped insolvency procedures, but officials warn against more harmonization of an area marked by deeply rooted national concepts of property rights.
— ‘Taboo’ areas —
If the CMU is to go further, the commission will have to tackle such subjects considered “taboo” in EU countries, a senior official said at last week’s industry conference with Dijsselbloem.
John Berrigan, the EU executive’s second-ranking civil servant for financial services, signaled a readiness to do so.
“Personally, I believe that these difficult issues — insolvency law, taxation, supervision — must be at least on the table, if we are serious about building a single capital market,” he said in a speech.
“To the extent that there are any low-hanging fruits in CMU, these ones are very high up the tree,” Berrigan said of harmonizing fiscal, bankruptcy and supervisory regimes.
“I know it’s difficult because the commission, and myself included, we’ve tried it before,” he said. “But I also know, as I knew back then, that the prize of a single market for capital in the EU is more than worth the effort.”
Berrigan emphasized that he can’t speak for the next commission. Still, arriving commissioners often find a readymade agenda on their desks, cut out with works in progress and legislatively mandated policy reviews. The staffers in Berrigan’s division will be drawing those up and preparing a future nominee for European Parliament confirmation hearings.
— Lasting priority —
So Berrigan’s remarks give a peek at the thinking inside the house.
“This is going to remain a key priority in the future,” he said of capital markets.
Another industry view of the CMU is that, however far policymakers push, they can’t impose confidence on financiers. Many investors remain nervous about Europe amid a fragile economic recovery and political turmoil in big markets such as Italy.
Such concerns, when crisis memories were more raw four years ago, were seen as another reason to start the CMU with small steps.
“A capital market union is not something that you can regulate into being,” Mijs, of the banking federation, said in the conference discussion with Dijsselbloem.
Berrigan acknowledged during his appearance that policymakers still can’t force the proverbial horse to drink. But they appear headed down the trail to the trough.
“If I show him the water,” Berrigan said, “he will drink it.”