Why an EU capital markets union is more necessary than ever in a post-Brexit landscape

A year ago, the European Commission set out its plan to build a single market for capital in Europe, a capital markets union. It was part of a much broader agenda of more trade, more competition and choice; the agenda of a commission determined to put growth and jobs first.

Our goal was to build deeper capital markets to provide better returns for savers and investors. It was to increase the funding available for businesses, and support long-term investment in the infrastructure that is the backbone of our economy. We knew that if capital markets could genuinely complement our banking system, our financial system would be safer. 

Early moves

A year later, I was asked by European Commission president Jean-Claude Juncker to take over the financial services portfolio. During that year, good progress has been made to move the capital markets union project forward. The first wave of actions is well under way.

We have made proposals to make it easier for companies to raise money on public markets. We have made it more attractive for insurers to invest in infrastructure projects. We have proposed to restart securitisation markets to free up bank lending to the real economy and increase investment opportunities, and we have come forward with a proposal to strengthen venture capital markets to ensure that entrepreneurs with good ideas can get the funding they need.   

But since the UK voted to leave the EU in this June's referendum, some people have asked whether this project should still be a priority; whether, with the EU's largest financial centre on its way out, the project is still in the EU's interest. To them, I would say that the arguments for building deeper capital markets and the benefits they could bring across the EU have not been changed by the UK's decision to leave.

The capital markets union action plan that was drawn up in 2015 was for all member states, and has received widespread support from governments, the European Parliament and industry. The possibility of Europe’s largest financial market exiting the single market just makes the case for a capital markets union stronger and more urgent. We need strong capital markets inside the EU, so that companies can have access to the financing they need whatever their size and wherever they are located.

That is why the European Commission remains 100% committed to the capital markets union project. It is why we want to quicken the pace, to press ahead with the second wave of ambitious actions, and be bolder where we can.

Aligning insolvency measures

Ambitious measures include the work we are doing on insolvency regimes. We know the different approaches to insolvency in the EU are a barrier to integrated capital markets and that poorly performing regimes stand in the way of a stronger banking system. Inefficient procedures make debt restructuring difficult and reduce creditors’ ability to retrieve non-performing loans.

The European Commission will soon present a proposal to encourage more effective arrangements for the restructuring of viable business debt in all member states. We will promote innovation, and give honest entrepreneurs who have worked to overcome bankruptcy a second chance.

Creating the right conditions for a European personal pensions market is another priority to inject savings into capital markets. This could provide economies of scale, reduce costs and increase choice for savers. It has an important role to play in linking long-term savers with long-term investment opportunities that can complement state-based and occupational pensions. We will use a public consultation launched this summer to quickly determine how to support the creation of a competitive personal pensions market. We will consider all options, including tabling legislation next year. 

To help European companies diversify their funding sources, we need to tackle the preferential treatment our tax systems give to debt. A stronger capital base would not only provide more investment, it would also make companies less vulnerable. So next month we will come forward with a proposal to address the long-standing debt equity bias in our system. We will also work to see whether we can simplify the system to reclaim withholding taxes when these are subject to double taxation, and develop a code of conduct with member states. 

Consumer financial services

We are working to give consumers more choice through our green paper on consumer financial services. The European Commission will present an action plan later in 2016. It will focus on how to build a genuine single market for consumer financial services such as insurance, pensions, loans and current and savings accounts. We will knock down the barriers to businesses offering their services across the EU and ensure consumers have the information they need. In the age of technological change, it makes no sense for Europeans to be confined to services on offer in a single member state. 

Europe must be part of this innovation and make sure it works for consumers. Financial technology firms are giving consumers more choice and greater convenience, and providing new services that meet consumers’ needs better. Their competition will improve the quality of service and contribute to a diverse financial landscape. Our challenge is to encourage this technological change, building confidence in our companies and investors, while ensuring consumers can make informed investment decisions.

We need to assess what more can be done to promote sustainable finance in our capital markets. Everyone knows we need to encourage more investment in low-carbon technologies. But we also need to make sure the financial sector is itself making the transition to the creation of a low-carbon, climate-resilient economy.

We are increasing funds available for sustainable investment through the European Fund for Strategic Investments. We are supporting standards for green bonds. We have required large companies to disclose information on environmental, social and governance standards. And we are working to develop a comprehensive European strategy on sustainable finance. The EU made clear commitments in Paris last year, at COP21, and sustainable finance can play its part in delivering them.

Work in progress

All this work needs to be supported by evidence-based policy-making. As part of the capital markets union action plan, we said we would launch a call for evidence on financial services legislation. We launched it to check whether legislation passed during the crisis is working as intended, and to see it is as growth-friendly as possible. We are committed to acting on our analysis of these responses.

We will detail exactly how we will do that by the end of the year. But the main thrust is already clear. We need to consider adjustments to increase funding to the real economy. We need to look at whether we can make legislation more proportionate and whether the compliance burden can be reduced for businesses. We will bear these issues in mind as we work to complete the reviews of the Capital Requirements Regulation and the European Market Infrastructure Regulation, and see what action we can take to address them while upholding a strong prudential regulatory framework.   

Since the financial crisis, we have done a lot to make our economies and our financial sector stronger. We have taken difficult measures to restructure our economies and restore the sustainability of our public finances. Immediate measures to support investment have been launched. Now, the European economy is in its fourth year of recovery but the recovery is slow. More remains to be done to address structural weaknesses and the UK referendum result has created uncertainty for the whole EU.

Against this backdrop, our focus will be to give the EU’s financial sector stability and continuity, and to deliver on agreed priorities. The capital markets union is at the heart of our efforts to take the single market a step further. It will remain an important part of our work to increase investment and to support sustainable growth in Europe.

Valdis Dombrovskis is vice-president of the European Commission and commissioner for financial stability, financial services and capital markets union, as well as the euro and social dialogue. He is a former prime minister of Latvia.