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Letter from Brussels: Uphill battle for CMU

There is enthusiasm for the EU’s capital market union (CMU) project. However, it faces prodigious obstacles in achieving its 2019 deadline. 

Immediate reactions to Commissioner Jonathan Hill’s February Green Paper give an indication of likely stakeholder responses. 

The UK chancellor, George Osborne, has welcomed the initiative: “If we get this right the benefits to Britain and Europe’s smaller firms could be huge,” he said. Clearly, the outcome could be greater investment opportunities, including for smaller companies.

The three-month consultation ends on 13 May. The Commission expects to hear from stakeholders including the European Parliament. It hopes to announce an action plan by September. 

According to an internal document, the obstacles to be overcome include making market data available for investors. At present, there can be a lack of information on creditworthiness. In parallel, BlackRock recommends an ‘asset passport’ to level the playing field between bank and non-bank financing.

Other difficulties are differences in regulation and supervisory enforcement. National legal frameworks are described as “diverse and fragmented” and company law and corporate governance rules are “insufficiently harmonised or inadequate”. The document also mentions a challenge involving “insolvency laws and [the] enforcement of contracts”. 

Finally, it cites tax barriers. This is a serious sticking point because, under treaty provisions, national governments hold all the cards. 

Another impasse could be objections to “single supervision”. This could be via the European Securities and Markets Authority. Here objection comes from the UK.  

Karel Lannoo, head of the Centre for European Policy Studies (CEPS), sums it up. He imagines a portfolio manager sitting in the City of London with €500m under management on behalf of pension beneficiaries. 

Up comes a prospect, a European small-cap firm. It has a brilliant patent that is likely to give high returns on investment. Currently the manager might be reluctant to invest – for example, due to a lack of familiarity with the national enforcement status even of existing EU Directives on corporate governance. 

Like a steeplechase, one fall means failure for the CMU; Commission, Parliament and the Council must all agree. 

The CMU process will follow the EU’s co-legislation procedure: the proposal will go to the Council and Parliament simultaneously; Parliament will then produce reports on the components of the CMU. If the Council agrees, Parliament, Council and Commission will enter trialogue talks to achieve political agreement.   

Timing is uncertain, although a source informs IPE that the Latvian presidency rates the CMU programme among its priorities.

Work has already started on the issue of securitisation. 

The green paper will be discussed by the Council’s Financial Services Committee. National finance ministers are likely to discuss the subject at an informal April Economic and Financial Affairs Council (ECOFIN) meeting. 

After that, the CMU will move formally to ECOFIN for discussion by finance ministers. Preparation for this discussion will have been carried out by the Council’s Economic and Financial Committee. 

Leadership falls on Donald Tusk, president of the Council. His office sets time-line targets. Tusk’s stated position is to uphold political and economic integration in the EU. Apart from Hill, another key player for CMU is Martin Merlin, director for financial services in the Commission.

Finalisation before Hill’s mandate ends in 2019 is by no means certain. “Its success will depend on the present political momentum, such as was seen for banking union, continuing during the next five years,” comments Diego Valiante, head of capital markets research at CEPS.

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