An EU capital markets union without the UK will be a smaller and more fragmented affair than had originally been envisaged. But how will the bloc work around the absence of what is currently its largest market?
The UK’s decision to leave the EU was a blow to the bloc's capital markets union (CMU) initiative, given that London hosts the world’s largest financial centre and many of Europe’s most liquid markets.
It is no wonder, then, that Société Générale chairman Lorenzo Bini Smaghi recently called for London to be involved in the CMU post-Brexit. Barclays CEO Jes Staley has made similar remarks.
Even before Brexit many bankers had doubts about the CMU’s prospects given the scale of regulatory harmonisation needed
However, that is unlikely to happen, at least not on an intimate basis, as the EU would insist on regulating UK financial services. This would probably be rejected by the UK, and anyway EU policy-makers do not want the eurozone’s main financial centre sitting outside the EU.
That strongly suggests the EU will go it alone, which will be challenging. Arguably, the eurozone has a single currency, a central bank, pan-EU regulators, large savings and lots of borrowers, but currently lacks the markets to efficiently combine all these factors.
Nonetheless, even before Brexit many bankers had doubts about the CMU’s prospects given the scale of regulatory harmonisation needed.
Also, there are four main eurozone financial centres, suggesting fragmentation, and even combined they are smaller than London and compete against each other. This makes economies of scale difficult and undermines the concentration and network effects London enjoys.
But for the European Commission, the CMU is a must and it has worked hard to advance the cause. It would cut reliance on banks for financing the economy and on Anglo-Saxon financial centres, but not all EU member states see this as a priority.
A key aspect of the CMU is putting the regulatory infrastructure in place, but bankers are sceptical that markets can be regulated into existence. They advocate the EU being more open to global capital.
Instead, the EU will probably resort to a ‘fortress Europe’ approach and seek to build the CMU behind regulatory walls and there are signs of that happening. It is an all too understandable reaction, but it could mean higher finding costs for EU businesses and households.
