By Pablo Portugal, Managing Director of Advocacy, Association for Financial Markets in Europe (AFME)
Europe’s economy is on another unpredictable course. The outbreak and resurgence of the COVID-19 pandemic over the last two years and now the economic impact of the war in Ukraine underscore why the European Union (EU) needs a resilient and diversified financial system able to withstand sudden economic shocks. Meanwhile, the financing needs associated with the green and digital transitions remain as urgent as ever: Europe’s financial system needs to be geared towards channelling the significant scale of investment required to enable these transformations.
Capital-market financing will need to play a central role in meeting these challenges. Yet, the EU’s capital markets remain fragmented and under-sized. Deepening integration and expanding the international reach of EU capital markets are, therefore, paramount to Europe’s economic prospects and overall strategic goals.
European capital markets and regulatory frameworks continue to evolve in the post-Brexit environment. Major legislative proposals that may have far-reaching impacts on the European banking sector, capital-markets ecosystem and sustainable-finance advancement are under consideration.
In light of such changes, the EU needs to pursue regulatory outcomes that not only preserve and reinforce financial stability and investor protection but, crucially, encourage increased participation in EU capital markets from both local and international players. A strong focus on this principle will be essential to further developing the EU’s capacity in primary and secondary capital markets.
Increasing markets’ competitiveness will be vital for Europe’s economic strength
Financial markets in the EU—or any other jurisdiction—do not function in isolation. They are interconnected, and financial centres across the globe compete with each other. This is especially true for wholesale markets in which sophisticated investors and market participants are themselves active in multiple jurisdictions and have choices to make regarding deploying their capital and accessing liquidity pools.
This is why policymaking should contribute, where possible, to strengthening the attractiveness and competitiveness of EU capital markets. In turn, this will support current efforts to scale up the Union’s market ecosystem, promote the international use of the euro and achieve greater strategic autonomy in financial services.
As a way to advance this objective, EU authorities could consider embedding the promotion of competitive and efficient EU financial markets in the mandates of the European Securities and Markets Authority (ESMA) and other authorities, alongside their existing core mandates. The importance of competitiveness is manifested in a number of areas. For example, an efficient and competitive securities-trading ecosystem leads to better outcomes for end-users and is important in attracting global market participants and promoting the growth of EU financial centres.
Promoting international cooperation and regulation supporting market development
The major successful global financial centres are characterised by their high regulatory standards, quality of their legal frameworks, openness to global pools of capital and scale of their underlying financial ecosystems.
Maintaining openness and connectivity with non-EU markets is essential in continuing to build the EU’s capital-market capacity. The EU should continue to champion open capital markets that allow EU participants access to international capital pools and funding opportunities while ensuring market integrity and fair treatment between EU firms and third-country entities.
Furthermore, greater importance needs to be placed on supporting global regulatory cooperation, particularly in the areas of digitalisation and sustainability, as jurisdictions grapple with common objectives and challenges. It is in the interests of European companies and investors to have globally aligned standards while maintaining the EU’s strong and ambitious leadership role in these areas.
Strengthening Europe’s primary and secondary markets
The EU is at a critical juncture in its decision-making around the future of its capital markets. The next two years will see the advancement and completion of major policy debates in areas such as market structure, prudential requirements for banks, sustainable finance and digitalisation, which will have the potential for significant change.
For example, as the EU competes with other global markets to attract company listings, attractive and harmonised listing rules on European public markets will be vital to support crucial access to market finance for EU companies. The EU is, therefore, undertaking a comprehensive review of company listing rules to encourage more companies to list on EU public markets, particularly small and medium-sized enterprises (SMEs). This should ensure that strong levels of legal certainty, transparency and investor protection are retained.
Meanwhile, legislators are currently debating a set of major, potentially transformational proposals for Europe’s secondary markets in the ongoing review of the Markets in Financial Instruments Regulation (MiFIR), which governs how markets function. This work is critical to promoting globally competitive capital markets in the EU.
An attractive, well-regulated trading ecosystem can nurture innovative, world-leading market infrastructures and promote enlarged liquidity pools within the EU. The promotion of market efficiency, competition among service providers and strong outcomes for investors and corporate and SME issuers should be at the forefront of the debate around these proposals for Europe’s market structure.
In this respect, proposals for establishing a consolidated tape—similar to a price-comparison tool for investors—should be particularly supported. A well-designed tape will promote more attractive and competitive capital markets and reduce home-country bias (where an investor tends to prefer companies or investments from his or her own country) in the Union.
As these debates progress, it is important to consider the wider international context—including, for instance, the United Kingdom’s parallel review of its wholesale-market architecture. As the EU reviews its own market legislation, if there is a shift towards a market structure that is ultimately less supportive of investor choice and prevents investors from accessing the most optimal trading conditions, this will not only result in additional costs for pensioners and savers, it also risks discouraging global market players from participating in EU capital markets, thus undermining their competitiveness in relation to other jurisdictions.
Now is the time to complete CMU
To conclude, EU capital markets have many strengths enabling them to thrive in today’s global environment—among them, the scale of the EU single market, the euro as a leading international currency and global leadership in ESG (environmental, social and corporate governance) financing.
In the recent Versailles declaration, the EU Heads of State agreed to create an environment that facilitates and attracts private investment by “creating more integrated, attractive and competitive European financial markets, enabling the financing of innovation and safeguarding financial stability, by deepening the Capital Markets Union (CMU) and completing the Banking Union.”
These objectives are achievable and within reach, but the EU must find the political momentum to deliver policies that will foster a globally competitive CMU that can support sustainable long-term growth in the coming years.