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The growth agenda

The European Commission’s green paper,  Long-term Financing of the European Economy, is a rarity– it gets applause from all quarters.

In fact, the green paper marks a strategic step forwards in the Commission’s thinking.
At its launch, Commissioner Michel Barnier stressed that the current spate of Brussels legislation is necessary to repair defects in the financial system of Europe.

Now comes  “proactive” legislation – new sets of rules designed to promote economic growth with a move away from short-termism in investment management, “a move, believe me, which is welcomed by the financial sectors themselves”, Barnier says.

The consultation paper gives stakeholders three months from 25 March to react to 30 questions. All are directed towards restoring the “solidarity of the financial sector”.

These cover the role institutional investors can play in long-term financing, for instance, and the impact of planned prudential reforms.

Unsurprisingly, PensionsEurope (PE) points to substantial references in the paper to the Commission’s instructions to the European Insurance and Occupational Pensions Authority (EIOPA) on the topic of the forthcoming review of the Institutions for Occupational Retirement Provision (IORP) Directive.

No doubt, PE has in mind the green paper’s statement that: “It will be important to ensure that new prudential rules …. do not unintentionally discourage sustainable long-term financing”. It adds: “The revision .… will therefore need to take into account the potential impacts on long-term financing of economic growth.”

In the context of Solvency II, the paper goes on to note that it has asked EIOPA to examine matters concerning detailed capital requirements for investments in certain assets.

As could be expected, PE finds it “positive” that the Commission deems it to be “important to ensure that new prudential rules for occupational pension schemes do not discourage sustainable long-term financing”. Matti Leppälä, PE’s CEO, stresses that the pension fund source of long-term financing “needs to be protected”.  

Joanne Segars, chair of PensionsEurope and CEO of the UK’s National Association of Pension Funds, complains: “Existing regulations, such as short-term accounting rules, prudential rules, and asset and liabilities valuation, have all been detrimental for long-term investment”.  She describes any “upcoming rules” as “a necessary development”.

A Dutch member of the European Parliament, Ria Oomen-Ruijten, warns against new prudential rules from Brussels that would direct pension capital into state assets with low interest rates. Such regulations, says the centre-right politician, would reduce investment in the real economy and damage the interests of pensioners.

On behalf of asset managers, Guy Sears, director of the Investment Management Association responsible for institutional investors, notes that the opportunities in financing long-term projects are enormous. Among ideas put forward is the creation of “a true European project bond market”.

The green paper is attentive to the banking sector in the EU. Barnier commented that, whereas in the EU 75% of capital would come from the banking sector, and only 25% from capital markets, in the US the equivalent figures were the opposite. John Davies, of the Association of Chartered Certified Accountants, supports this view: “A shift to equity financing is long overdue,” he says.

Another topic in the paper is venture capital. Here, funds-of-funds are described as possible “efficient instruments to increase the volume of venture capital”. The sector is said to be suffering from lack of investment and the current prudential regulation of banking and insurance is blamed.

Following the consultation, a response from the Commission may be forthcoming before the summer break”. An official said that some legislation could be drafted and presented to the parliament shortly afterwards.

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