The European Capital Markets Union, useful but not enough!

06.18.2024 2 min

Let us not overestimate the decisive nature of the change desired by the European Capital Markets Union project. Will the reinvestment of the financing capacity (surplus) of the European Union in Europe, rather than in the United States, be guaranteed? Indeed, before the idiosyncratic crisis in the euro zone beginning in 2010, the financing capacities of the Northern countries were able to back the financing needs of the countries in the Southern zone, despite the organisation of the financial markets as it still stands today. The measures proposed in favour of the capital markets union, by Christian Noyer for example, seem very useful to me. But they are not a “game changer”. Today, we can invest freely on each European stock exchange or finance European companies through deposits in banks or investment in debt or private equity funds… Certainly, a more integrated, more harmonised, more European-supervised market, would give more depth and liquidity to European financial markets. They would therefore become more attractive. The unity of the European market would also better protect savers by providing them with greater security. So, it would undeniably be a significant plus, but not enough to ensure the recycling of surplus savings from certain European countries in Europe itself. Why? How can we be sure of this with more certainty?

Two elements would be able to trigger a change in the geographical orientation of the European savings surplus: -On the one hand, the implementation of reforms in the Southern countries (France included) aimed at not having permanently high public deficits, and at gradually approaching the level of public debt to GDP of the Northern countries. This would enable the acquisition of a sustainable credibility of public finances. This would allow significant progress in real and structural solidarity between the countries in the zone. And thus promote “risk sharing” between European countries. Leading to the confidence of Northern savers-investors in the sustainability of the debt of Southern countries.

Investors from Northern countries in fact stopped investing their current account surpluses in 2010 to finance the needs of Southern countries, when they understood that solidarity was not a given. And they are still very reluctant to provide such solidarity, fearing that the ant will have to help the cicadas all year round and every year. Thus, today the current account balances of the South are at zero +, since the end of the euro zone crisis, because a current account deficit could be difficult for them to finance. And the surpluses of the North are mainly placed in the United States…

– On the other hand, a European impetus for a more dynamic European economy and Schumpeterian growth favorable to innovation. Impetus through incentives to raise the level of R&D, through well-measured and targeted subsidies and partial guarantees on carefully chosen investments, through public-private investments, through incentives for innovation and industrialisation in the future industry sectors, etc.

Likewise, non-naive regulation (ESMA, competition, green, etc.) and taking into account the competitiveness of our industries, as well as appropriate taxation, finally the development of a culture of risk and not a religion of precaution -a sign of our aging- should also allow savers and their representatives (institutional investors) to want to invest more in many future projects in Europe, because they would offer good profitability prospects.

These two elements are not contradictory, rather complementary, to the European Capital Union project. But they seem more decisive. Favouring or even focusing only on the capital union would symbolically exaggerate the role of finance and would entail the risk of major disappointments down the road. Good projects have no trouble getting financed.

Olivier Klein
Managing Director of Lazard Banque France
Professor of economics at HEC