The European Union has finally adopted measures facilitating the establishment of a capital market. The goal is to encourage capital to stay within the European economic space to maintain sufficient funding for businesses to recover from the crisis.
Could this be the creation of a real capital market in Europe? That’s certainly what the European Commission hopes for, as it has been fostering the creation of a capital market across the European Union in recent months. For those unfamiliar with the term, a “capital market” is simply the meeting point for those with excess capital and those in need of financing. These economic agents converge within the financial market, the money market, and the bond market.
Europe has long identified one of its weaknesses: the flight of numerous capital beyond its monetary borders, leading to a lack of internal funding. Since 2014, Jean-Claude Juncker, then President of the European Commission, envisioned the creation of the Capital Markets Union (CMU). He initially aimed for 2019 to implement new regulations. However, with the shock of Brexit, the context evolved unfavorably, and it would ultimately take three more years to see concrete measures. After unveiling the action plan for the Capital Markets Union in 2020, the European Union adopted its “Capital Markets Union” package a year later.
Protecting the Euro
In practical terms, the EU has voted to implement measures that will allow Europeans (both individuals and professionals) to more easily raise capital within the European territory. The goal is to prioritize a continental agreement to keep all capital within the same territory—in essence, for the CMU to serve as a new financial border to absorb exchanges and limit outflows.
This serves a simple purpose: financing companies relying on debt. If there isn’t enough available capital, financing becomes more difficult, impacting growth. Ultimately, this weakens the European situation and could lead to a financial crisis. Similarly, capital flight can harm the single currency, the Euro. Europe needs a strong money market and a strong financial market and, therefore, needs to retain its capital.
Four Levers Activated
To implement the CMU, several levers are activated. Firstly, the creation of a Single European Access Point (SEAP) aims to centralize all economic data from all EU companies and investment products. This visibility will even offer smaller companies the opportunity to benefit from investments. Secondly, long-term investment will no longer encounter limits (a minimum threshold of 10,000 euros until now). Investment funds will also be more regulated and encouraged to invest in European companies. Finally, a revision of rules related to financial instrument markets will bring greater transparency, allowing all investors access to trading data.
A Difficult Context with a Whiff of Turning Point
The context has favored this acceleration and step forward in the realization of the Financial Union, long-desired by many stakeholders. The crisis caused by the Covid epidemic and now the Russian invasion in Ukraine are costly moments for national economies. Reliable mechanisms must be found to maintain reliable financing within the EU.
As the geopolitical situation is completely disrupted by the arrival of war at the gates of Schengen, the EU also sees an opportunity to consolidate its space. The accession requests from Ukraine, as well as Georgia and Moldova, are opportunities for the EU to seize. However, these matters will not be addressed without taking into account the financial dimension: to enter Europe, these countries will have to accept the rules established by the European Commission, particularly regarding the preservation of European capital.
More than ever, the European Union aims to solidify its model and take advantage of this troubled period to prove to its critics that it is an indispensable tool for the Old Continent to recover.