EU eyes markets as saviour for flagging economy
By Huw Jones
LONDON (Reuters) - The EU turns to stock and bond markets this week with reform proposals intended to help companies raise the cash needed for growth-boosting investments, hoping to emulate the more active capital markets of the United States.
Jonathan Hill, the EU's financial services chief, will on Wednesday set out possible reforms to create a capital markets union (CMU), eliminating national rule differences to help markets complement bank lending in doing the heavy lifting involved in raising money for the economy.
The region depends on banks for 75 percent of funds to grow companies, with only a quarter raised on markets, making it vulnerable to ebbs and flows in the availability of bank finance, whose unpredictable nature was shown when it dried up in the financial crisis of 2007-09.
Hill will list ways to encourage more financing from private placements or companies directly tapping select investors; boosting securitisation, or selling bonds based on a pool of loans like mortgages, and making it cheaper for small companies to list on stock markets.
He wants "quick wins" by 2019 that don't involve protracted lawmaking, as Brussels seeks to show it is doing all it can to create more jobs and growth for the EU's 500 million citizens.
Given the City of London is the EU's top financial market, this should be good news for its activities, but some fret it could be a double-edged sword.
The inclusion of "union" in the project's name, conjuring up more European integration, has raised suspicions that a new EU super-regulator is part of the plan, something Hill's officials have denied. Others fret it could get bogged down as other regulatory demands come out of the woodwork.
"The worry is that this becomes a Christmas tree and everyone will want to put their own decorations on it and then we lose sight of what we are trying to do," said Mark Boleat, policy chief at the City of London.
"The objective must be better, more efficient operation of capital markets by removing barriers," Boleat said.
CITY-CENTRIC
UK financial services minister Andrea Leadsom the City was behind the reforms and the EU was a "sinking ship" in need of such measures. "I think the City is very keen on the project and we are very conscious of the need to look at it with a European focus, and not just a City-centric focus," Leadsom told Reuters.
The aim over time is to engineer a fundamental shift in the EU's capital market to emulate the United States, where markets supply the bulk of funds for companies.
Few expect the EU to match the U.S. capital market anytime soon, citing deep-rooted cultural differences. Companies in the EU are typically family held, while in the United States people habitually build up a business, sell it to outside investors, then start a new one.
Stock market capitalisation in 2013 totalled 11.5 trillion euros in Europe, compared with 17.5 trillion euros-worth in the United States, for an economy of roughly the same size.
The high-yield market for corporate debt in Europe is half the size of its U.S. counterpart. And the outstanding stock of securitisation in Europe, at 1.4 trillion euros last year, is dwarfed by the 7.6 trillion euros-worth in the United States.
The Association for Financial Markets in Europe (AFME), a bank lobby, said increasing the amount of funds from markets by 10 percent to 35 percent over five years is probably realistic.
In the medium term, Hill has mentioned possibly tackling barriers such as differing insolvency and tax rules, which snag cross-border trading but have proved insurmountable given their removal would impinge on sensitive national sovereignty.
Italian fund manager Alberto Giovannini published a far-reaching EU report in 2001 listing 15 such barriers to a cross-border capital market, several of which remain.
"The CMU is a great concept and it's not pie in the sky," Giovanni told Reuters. "It's an opportunity to try to see how far we can get on this."
(Editing by David Holmes)
