EU finance ministers dream of a capital market union

The EU finance ministers have been looking for new sources for investment in Europe, one of which could be the "capital market union." But what is it? Bernd Riegert reports from Riga.

Deutsche Welle, 26 April 2015

The Greek crisis dominated discussions at the summit of European finance ministers. But besides Greece, the 28 ministers also had the next big project to discuss: the capital market union is to be put on track. The first decisions for the creation of a single market for capital investments and finance streams in Europe have to be made now, even if the union is only expected to be completed in 2019. "It is extremely important and very urgent that we start on it now," the responsible EU commissioner Jonathan Hill said at the meeting of in the Latvian capital, Riga.

According to Hill, the aim of the capital market union is to create more potential sources of financing for companies, beyond the traditional bank loans. Small and medium-sized businesses are to be given the opportunity to get financing directly, either from investors or from stock markets across Europe. "That way we can free capital for investments that have been frozen until now. We have to tear down the barriers that still exist in Europe," said Hill. This summer, the commissioner intends to present a more exact road map explaining what laws and directives the finance ministers and the European Parliament will have to enact to create a unified capital market.

German federal bank approves

Weidmann is cautiously optimistic
about Europe's grand new project

Jens Weidmann, president of the German federal bank, welcomes the idea. "The capital market union has a real potential, but it will only come into its own in the long term, through a better distribution of capital and a sharing of risk," he told reporters in Riga. It was not, he insisted, a short term solution to the low investments in the EU, which have significantly dipped since the financial crisis of 2008. Hill, along with the majority of finance ministers in the EU, is working on the assumption that the planned capital market union could bring more venture capital for young digital companies, so-called start-ups. The plan is to match the US on this point, where direct investments in start-ups are much more common than in Europe.

In the US, significantly more companies get capital from stock markets, whereas in Europe banks dominate the financing of economic activities. No wonder, then, that some banks are much more reserved about the plans for a capital market union - even if the European Commission keeps insisting that the it is not meant as competition, but as support.

Weidmann likes the idea, in principle, of realigning the balance between investments from investors and from banks. But he points out that these investments will be secured through loans, not debts, which could lead to risky speculations. If it's done right, Weidmann thinks the capital market union could have advantages for the whole of Europe. "Cross-border investments with private capital could lead to a better distribution of risk between member states in the European Union," he said. Regional shocks could then be absorbed by diversified capital market investments. "The effects on the economies of individual countries would not be as strong. That could reduce the vulnerability of individual states and so the whole union," Weidmann said.

'More financial sources lead to more stability'

Guntram Wolff, the market expert invited to give a lecture to the finance ministers, expects the capital market union to make Europe's financial system safer in the long-term.

"More financial sources lead to more stability, Wolff told DW. The ordinary saver could also benefit because in a wider financial market across Europe he could expect higher interest and profits for his savings if there is an alternative to the traditional banks. But critics warn that a poorly regulated capital market union could lead to the same kind of highly risky, un-transparent financial products that led to the 2008 financial crisis.

Schäuble thinks infrastructure is the key

These products, also known as securitizations, were also a vehicle for investments, which is why the European Central Bank and the Bank of England are working to at least allow relatively safe securitizations once again - in other words, open the door to the financial casino again.

"The initiative of the European Central Bank and the Bank of England is only aiming for a specific section of the market - namely simple and relatively high-value securitizations," said Weidmann. That might be relatively sensible, but "on the other hand, that shouldn't lead to people forgetting the lessons of the crisis and allowing some to take on risk that they can't take and don't even understand."

A short-term prescription

The European Commission and the finance ministers agreed in Riga that the capital market union would make a good addition to Europe's investment initiative. In the next few years, the EU wants to encourage "strategic" investments, from public and private sources, in infrastructure and a number of projects, of 315 billion euros ($343 billion).

"We have a broad agreement that we have to concentrate on that, to support our priority for Europe: growth! That's how we successfully fight unemployment and youth unemployment, and not some time in the future, but now," said German Finance Minister Wolfgang Schäuble.

Wolff, who runs the Brussels think tank Bruegel, is not quite so enthusiastic. In the short term, he warns that the capital market union will not be an effective cure for the credit problem in the southern European states. "We shouldn't dream that the capital market union will solve problems in Greece or other southern countries. In those places, we have to solve the problems in the banking system and the state debts."