Creating a capital markets union (CMU) for Europe is an ambitious concept but a promising one for the less-developed equity and capital markets in the EU. The idea of providing essential funding to those economies most in need of it is noble and EU commissioner Lord Jonathan Hill’s initiative a good first step.
But if plans are meant to achieve wide-reaching improvement, a general change in attitude is needed across EU member countries.
In the more market-driven countries of the US and partly the UK, equity markets are a significant source of funding, but for many continental European countries equity investments are seen as a last resort. This, coupled with an often-quoted bias towards lower-risk investments on the investor side favouring bonds and loans over equity, forms a significant barrier to some of Lord Hill’s CMU ideas.
Only if the attitude towards equity investments changes will a promotion of more venture capital and private equity involvement bring the intended benefits – both for investors and borrowers.
And then there remains the sovereign issue. No matter how great a business, the CMU will not do away with its nationality – in the eyes of the credit rating agencies and investors, identical businesses in Portugal and Germany will receive different funding terms. If this rings true, Germany’s Mittelstand could be one of the biggest beneficiaries of CMU. Small businesses in lower-rated countries such as Greece and Portugal are likely to be less attractive to investors, be they institutional or especially retail investors.
While everyone hopes the CMU can be a quick fix for all problems in the EU economies, the authorities still have some work to do to change attitudes and make CMU benefits more well balanced – or at least to manage expectations.
