The lack of demand rather than supply for both credit and capital is a common criticism from investors of the EU’s capital market union (CMU) programme. The investment sector sees the shortage of projects as the real problem – something that the programme cannot solve.
This view is endorsed by the World Future Council (WFC), a sustainability think tank based in Hamburg. In its response to an EU policy paper on the CMU, the WFC said “there is no genuine economic necessity to introduce policies to ease access to capital markets”.
According to the WFC: “interest rates close to zero and quantitative easing have made access to credit easier than ever”. It accuses the CMU of having less influence on growth and job creation than originally claimed.
Responding to this criticism, Diego Valiante, of the Centre for European Policy Studies (CEPS), explains there is confusion between viable projects generally, and a famine for “risk-taking” capital.
The CEPS fellow says that fragmentation caused by cross-border barriers is constraining potential investors from taking advantage of opportunities in areas such as high-growth companies.
Finger-pointing as to the causes comes from the European Commission itself and blame is placed on recalcitrance by member states. “We know that there are things out there that member states should take an axe to,” Niall Bohan, head of the banks and financial conglomerates unit in the EC’s DG Markt told a recent conference on SME investment.
“In the area of taxation, member states really should help themselves to remove barriers,” he said, noting that member states have already been consulted on areas such as double taxation. “We may have to fall back on naming and shaming,” he added, presumably the Commission’s last resort.
On similar lines, Thomas Moncourier of PensionsEurope, points out that member state decisions are crucial for the development of investment projects, including cross-border opportunities. Policy-makers should work towards ensuring a stable regulatory and fiscal framework.
Others reveal several bottlenecks to cross-border investment into smaller companies. According to Jason Piper, who deals with taxation and law at the UK’s Association of Chartered Certified Accountants, these include differences in liability and insolvency regimes, corporate governance practices, reporting standards rules applied to lending information for SMEs, rules on insolvency and company law, and private placement regulations.
“All complicate the management of cross-border investments,” Piper comments. “Investing in many smaller entities rather than a few larger ones will always entail some greater degree of management involvement. But the current range of rules and regulations… makes SME investments even less attractive.”
Also on the list is the 2008 Prospectus Directive, which is currently under a Commission consultation. Jonathan Hill, commissioner for financial services, describes the exercise as “a key focus… to reduce the administrative hoops through which companies have to jump”.
Detailing the hoops, Susannah Haan, secretary general of EuropeanIssuers notes that the outlay of producing a prospectus for an IPO, including audit and legal fees, was 2-2.5% of the transaction 20 years ago. Now, for an offering of less than €6m this has risen to 10-15%, although for an €100m IPO the outlay falls to 3-7.5%. She points to a need to reduce listing costs by 30-50%, as in the US Jobs Act. “You need different policies for different types and stages of growth of a company, from crowd-funding, through other forms of finance” she says.
Piper refers to “crippling” cross-border barriers to establishing new companies and calls for “a reduction in the heavy paper work demanded in some ‘old Europe’ economies, but without losing the investor protection safeguards”. The administrative burdens tempers enthusiasm to consider cross-border investment.