One of the more dramatic self-inflicted wounds from Brexit has been the shift of share trading activity out of London, underscored by news this week that Amsterdam has overtaken London as Europe’s largest share trading centre.
But high-profile gains for the Netherlands shouldn’t disguise the arduous task the EU faces as a whole if it is to capitalise on the UK’s exit from the single market and bolster the fortunes of its own financial centres.
In Brussels, the centrepiece of this strategy is the long-promised Capital Markets Union, which aims to unclog cross-border investment flows and boost access to finance for European companies.
A blog post on the CMU to be published on Friday morning by two authors from the European Stability Mechanism, the euro’s crisis-fighting fund, does not lack ambition.
The report, prepared by the ESM’s chief financial officer Kalin Anev Janse and Rolf Strauch, its chief economist, calls for a dramatic enhancement in the supervisory powers of two existing European regulators, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.
The two bodies should be given a leading role in defining regulations over areas such as green and digital finance, the authors argue. The bodies should see enforcement powers ramped up and be granted the authority to directly supervise big international financial participants.
“The challenge for the EU is to define and build up an efficient supervisory model that harmonises markets and upholds transparency and investor protection,” the paper argues. “At present, divergent supervisory practices across the EU hamper cross-border investments.”
This all chimes with the European Commission’s ambitions, as the EU pursues so-called strategic autonomy in financial services. Mairead McGuinness, EU financial services commissioner, said on Thursday that Brussels is doing “a lot of spadework on CMU”.
Last month, the commission issued a paper exploring ways to enhance the international role of the euro and reduce the EU’s dependence on financial services outside its jurisdiction — most obviously in London. It argued that the issuance of hefty quantities of EU debt as part of the pandemic recovery fund could help foster capital markets integration.
In September, the commission published a plan to rejuvenate the CMU with recommendations that included a push for supervisory convergence across the single market.
The commission has also been sending tough signals to London as the UK seeks market access, or equivalence, decisions from Brussels to help the City of London continue to serve EU customers in critical areas including derivatives.
Michel Barnier, the EU’s former chief Brexit negotiator, on Thursday made it clear that the commission is in no rush, saying the EU would not take any risks with its “financial stability” and “financial sovereignty” when considering an equivalence decision.
But it is far from clear how much momentum the CMU will gain under the current Portuguese EU presidency at a time when the political agenda is dominated by more pressing coronavirus-related items. Progress on a host of controversial files, including reform of the EU fiscal rules and the deepening of the monetary union, will be difficult before the outcome of German elections is known in September.
There is also a long history to the CMU project that would suggest contained expectations. The CMU brand has been around since the middle of the last decade, but the concept has been in circulation for far longer. Progress has foundered over the deep divisions between the interests of various member states.
For example, harmonising insolvency laws and other rules that give clarity to investors could form part of cross-border integration, but as one EU official put it, that particular “holy grail” has remained elusive. Making progress towards the CMU will entail overcoming the competing interests of EU financial capitals — no mean feat — and the embedded views of their own national regulators and policymakers.
Brexit may have given impetus to those arguing that the CMU needs to be pushed harder. But that doesn’t make the obstacles any easier to overcome.
Additional reporting from Arthur Beesley in Dublin
Spurred by Europe’s vaccine rollout, a report from the European Commission forecasts the euro area GDP will grow 3.8 per cent in 2021, with similar growth in 2022. However, the commission’s forecast hinged on the bloc being able to successfully vaccinate 70 per cent of the adult population by the summer, which the EU’s economics commissioner Paolo Gentiloni acknowledged would be “quite challenging”. (chart via FT)
Frans Timmermans, commission executive vice-president, delivers a keynote speech via videoconference at the World Sustainable Development Summit.