Frankfurt/Main: compact and connected

AMBITION – STRENGTHENING THE CAPITAL MARKETS

An alternative for Europe



The referendum decision on 23 June 2016 by British voters to leave the European Union was a moment of shock. Now it is important to draw the right lessons from this event. Deutsche Börse, a global company with firm European roots, has a particular responsibility in this respect – like other large companies in Europe.

Yet not everything is new since that 23rd of June. Britons will remain Europeans, even if they are to leave the EU. Hence, Brexit negotiations will be decisive for the long-term future – not only as far as the European Union is concerned. As Europeans we must uphold our tried-and-tested fundamental principles of liberty, even though these are not very popular right now.

These principles have brought us peace and prosperity for many decades. Looking at current developments, we can see that this is something we cannot take for granted.

Continental Europe will therefore have to continue its close cooperation with the United Kingdom. This is something the market will realise, since the rules applicable to international markets and to competition do not change overnight. But of course, these rules call for new, more intelligent solutions in order to prevent imbalances, especially in Europe. To maintain its stance in global competition, Europe must do its homework.

Capital Markets Union

The Capital Markets Union is a project of the European Commission, to mobilise capital for companies and infrastructure projects and link savings with growth potential. In September 2015, the European Commission presented its Action Plan for Building a Capital Markets Union, which set out a programme until 2019.

Capital Markets Union as a realistic option

It will thus be all the more important for financial market players to focus on implementing the Capital Markets Union envisaged by the European Commission. There are numerous points in favour of such a union, with a pragmatic view being the most compelling one right now. In contrast to the integration of European countries on other levels, harmonising financial markets appears achievable, since it would neither interfere with the rights of national governments nor their populations' vested rights. Quite clearly, there is simply no acceptance for such extensive intervention from Brussels, as evidenced dramatically by Brexit.

A fully fledged fiscal union, however welcome it may be for very good reasons, would bring high-volume, Europe-wide capital transfers in its wake, which would only reinforce the feeling of politics and responsibility drifting further and further apart. What we need is a true European capital market – not in spite of, but because of Brexit coming. A Capital Markets Union would help secure a strong European position in the face of global competition, and can count on the self-interest-driven approval of the parties involved. Such a union is a very effective solution to many of the challenges we as Europeans are facing today: developing and preserving infrastructure, establishing sustainable pension schemes, identifying and taking structural action to reduce the high level of unemployment reigning in certain countries, financing growth.

The European Commission’s push for a Capital Markets Union is encouraging. It would be quite the opposite of governmental intervention: in fact it could unleash an equally strong macroeconomic power that would heal disparities caused by the European Monetary Union – and, as a consequence, re-invigorate acceptance for the single-currency project, with positive political feedback.

Opportunities provided by a single European capital market

It is as clear as day that more intensive cross-border capital flows would flush significant benefits into the European economy; it would make capital more accessible all over Europe, and unlock new investment potential that would then move in the market transparently, under the same conditions for everyone. Users on all sides have already been identified. Large state pension schemes as well as insurance companies are currently looking for long-term investment opportunities. Countries in Europe are facing the challenge of expanding and modernising infrastructure: railway lines, motorways, bridges, airports, local transport in densely populated regions – these are just a few examples for areas where all European countries have some catching up to do. It is especially in these areas that a swift and sustained expansion would benefit the real economy – and hence, the people. From large conglomerates to tradesmen, from frequent fliers to holidaymakers, whether you are in a car, on a local train or a long-distance express train: we all need a reliable infrastructure that is ready for the future.

Free movement of capital across Europe would provide relief for public-sector budgets. Infrastructure bonds tradeable across Europe would provide for efficient flows of capital, in line with requirements. In addition, this would create advantages for the countries and societies where measures would be implemented and buildings constructed – particularly as far as transparency, efficiency and jobs are concerned. This is because such new funding would flow into areas with sufficient transparency regarding planning, construction and operations. Such an approach might be beneficial, for instance, for regions where public funds have “trickled away”: if transparency becomes a sine qua non for investments, these will actually reach local people. This would trigger a self-reinforcing process throughout Europe – and in fact, it might be the starting point for a more vibrant equity culture in Europe.

“The Capital Markets Union offers a very effective solution for numerous challenges we are currently facing in Europe. For the real economy, it will provide easy and secure access to capital.”

Carsten Kengeter, CEO, at the Luxembourg Financial Markets Forum, 17 October 2016

Financing the real economy

The mechanism of a Capital Markets Union, as we have outlined it here, would facilitate the matching of capital and investment projects, regardless of whether banks are involved, providing more long-term perspective. At the same time, it would make European capital markets more robust and diversified, providing a new level of transparency that would facilitate infrastructure investments bringing bridges, rails, and school buildings to the people who need them. But above all, the Capital Markets Union will provide easier and safer access to capital for the real economy, and for Europe's growth companies. Brexit is a warning signal as well as a call to finally seize this opportunity.