Former European Central Bank president Mario Draghi has called for the European Securities and Markets Authority (ESMA) to “transition from a body that coordinates national regulators into the single common regulator for all EU securities markets, similar to the US Securities and Exchange Commission” to fully enact and support a “genuine capital markets union (CMU)”.
Currently, fragmentation is hindering efficient financial intermediation and limiting flows of savings into European capital markets, Draghi stated. In spite of attempts by the European Commission to establish the CMU and combat this, issues including the lack of a single securities market regulator and trading rulebook, inconsistent supervision, and a lack of alignment across EU member states remain significant blockades.
Amendments to ESMA’s role and governance structure in this context will be critical to achieving the objectives of the CMU, he said, arguing that governance and decision-making processes should be removed as much as possible from the interests of EU member states in a similar model to that of the ECB Governing Council.
“Turning national security market regulators into subsidiaries of a single, EU-wide one will face fierce resistance, not only by the national bureaucracies that will feel directly displaced, but also by trading platforms and market participants who draw sizeable rents from the status-quo fragmentation,” the report warned.
In order to prevent expected opposition, the supervision of purely local issuers should be left to national regulators and the initiative should begin with the supervision of issuers and market structures before moving onto mutual funds. Additionally, joint supervisory teams between ESMA and national supervisors should be established “to ensure a constant and timely information flow among them”.
A reduction of regulatory fragmentation, including the introduction of a harmonised cross-border insolvency framework, the removal of cross-border taxation obstacles and centralised clearing and settlement are all needed to improve the capital market landscape, the report stated.
Also necessary to improve European competitiveness is reestablishing the appeal of European stock markets for IPOs and for companies which have already gone public. To do so, again, regulatory complexity needs to be reduced, the report argues, and harmonised across the region. “This would, de facto, create a true pan-European multi-located stock market,” it continued, adding that “the task of simplifying and harmonising regulation should be assigned to ESMA”.
Allowing dual-class shares for IPOs will make European markets more appealing to founders, who can retain control of their firms, and will help to support earlier capital raises in companies’ early stages, the report continued.
Productivity gains
The preexisting global paradigm is fading, Draghi argues, citing the slowdown of rapid world trade growth, increased competition from abroad, lower access to overseas markets, an energy crisis and geopolitical instabilities as threats to European stability. “The foundations on which we are built are now being shaken,” he affirmed.
Despite a strong base, including a combination of high economic integration and human development and low inequality levels, growth in the EU has stagnated, Draghi said. Compared to the US, economic growth has slowed over the past two decades. At the same time, China has surpassed the region in GDP growth. This is primarily due to slow productivity growth, Draghi stated, associated with slower income growth and weaker domestic demand.
By 2040, the European workforce is expected to shrink by approximately two million workers per year. If average productivity growth rates since 2015 are maintained, the region would only be able to keep GDP constant until 2050, Draghi said; at a time when digitalisation, decarbonisation and defence capacity are increasingly vital focal points.
“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions,” Draghi warned.
In order to fund start-ups and scale-ups, supporting innovation and high-tech projects, there needs to be a “significant increase” in available equity and debt funding, he stated. To do so, occupational and private pension systems in EU member states need to be strengthened.
Plans for pensions
“The EU must better channel household’s savings to productive investments. The easiest and most efficient way to do so is via long-term saving products (pensions),” the paper affirmed.
The European Fund and Asset Management Association (EFAMA) highlighted this focus in its response to the paper, with senior director Bernard Delbecque agreeing that underdevelopment of these regimes is limiting capital flow. Delbecque presented three areas of reform needed in this space.
Underdevelopment of these regimes is limiting capital flow, it said, with Delbecque presenting three areas of reform needed in this space.
“Firstly, individuals need to be better informed about the importance of long-term savings products to secure adequate income in retirement. Secondly, governments should provide sufficient tax incentives to encourage retirement savings, helping individuals overcome the natural tendency to prioritise short-term needs.”
He continued: “Member states should learn from best practices in other countries, like automatic enrolment for occupational pensions and life-cycling strategies to increase the proportion of pension savings invested in higher-yielding assets. Fourth, the Pan-European Personal Pension Product (PEPP) needs to be reviewed and simplified to address current challenges and make it a viable product.”
In its response, Adam Farkas, CEO of the Association for Financial Markets in Europe (AFME), agreed that “the mobilisation of private and public finance at scale will be essential to securing the future of Europe’s growth and competitiveness on the global stage”.
Despite presenting a complex set of changes and recommendations, Draghi has an overall positive outlook on Europe’s ability to remain competitive and enhance its global position. “Our confidence that we will succeed in moving forward should be strong,” he stated. “Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges. And it is long since self-preservation has been such a common concern. The reasons for a unified response have never been so compelling – and in our unity we will find the strength to reform.”
©Markets Media Europe 2024
