Why Europe needs a Capital Markets Union

 In Investment, News

As his five-year tenure in Brussels ends, Carlos Moedas, the European Union Commissioner for Research, Science and Innovation expresses the need for a Capital Markets Union during a lunch organised the American Club of Lisbon
The European Union to set up a Capital Markets Union in a bid to unlock funding for the growth of European companies.

This is the message from Carlos Moedas, the EU Commissioner for Research, Science and Innovation who addressed a select number of Portuguese, US and other international business leaders in Lisbon in May.
Commissioner Moedas explained that investment in Europe remains “heavily reliant” on the banks, with no significant differences in financing conditions between EU countries, differing rules and market practices for products like securitised instruments and private placements.
At the same time, shareholders and buyers of corporate debt rarely go beyond their national borders when investing while many SMEs and seeder startups still have limited access to finance to grow their ideas and companies.
“Today, there is no Capital Markets Union and I think there should be. We spent a lot of time talking about the Banking Union, but we didn’t talk enough about the capital markets union” he said.

Too dependent on the banks
Reflecting on the financial and banking crisis from 2007, the Commissioner recalled, “We had the banking crisis and realised that we could not solve it country by country, so we had to build a system that was supranational so there was a resolution mechanism at a European level with supervision of the banks. We spent time looking at the differences between the North and the South of Europe in 2015 and discussed if we should have a deposit guarantee at a European level.
“The reality is that if you look at the Banking Union in Europe, it actually worked quite well” he added, recalling the opinion of respected economist and university professor António Borges (Died 2013) who eight years before had warned that Portugal’s economy and businesses, like that of many European countries, were “too dependent on the banks.”
“European companies just use (and continue to use) the banks as a source of finance and bi-lateral loans. Eighty percent of new financing was from the banks eight or nine years ago, while just 20% came from private financing — private equity or venture capital. In the US it is the contrary; 20% comes bank loans and 80% from private equity. By 2017, 86% of new financing originated from bank loans and 14% from other sources, so the situation is worse!” said Carlos Moedas.
The commissioner said the problem was how to create a Capital Markets Union and explained how the EC has spent five years doing “very simple things” which should have an impact.
“The idea is to have a single prospectus that is the same for anyone who wants to raise money in Europe and to really open up a path for more venture capital and inject more money into venture capital” he said.
And continued, “We have developed this idea of funding funds for Europe in which we will put in €400 million of public money with the condition that the partner is private and that a private group of people will, for each euro of public money invested, invest three euros of private money. We cannot just rely on public money; we have to attract private money” he added.
In June 2017, the Commission updated and complemented the Capital Markets Union action plan by strengthening existing actions and introducing new measures. The 2018 updated recommendations covered financing for innovation, start-ups and non-listed companies; making it easier for companies to enter and raise capital on public markets, investing for long-term, infrastructure and sustainable investment, fostering retail investment, strengthening banking capacity to support the wider economy, facilitating cross-border investment and strengthening the capacity of EU capital markets.
“We will raise around €2Bn, which will make a difference in the Venture Capital industry in Europe because that will be investment in other funds (other than banks). The consequent leverage effect will be €8Bn to €10Bn” he said, adding that the problem in Europe was not creating good companies but good companies getting the necessary finance to develop their ideas and grow.
Moedas gave the example of booking.com, a Dutch company, not a US one. “It, like so many other European companies, had to go to another part of the world to get the investment they need to scale” he said.
“Often they go to the US and come back to Europe and to other markets, but first they had to go to the States. So, the development of the Venture Capital industry is crucial for us and for Europe which is why we have put more emphasis on VC and these types of funds” added Moedas.

The US and China – a rival for Europe?
The European Commission has also just developed a strategy on China and Carlos Moedas believes that Europe must see China as an ally but also a competitor whilst not being naive about the economic giant.
“China is not naive about us and the idea of a world where we have the perfect rules in Europe and that they are so perfect that nobody outside of Europe would somehow not want to not comply to those rules is a bit naive” said Moedas.
Reflecting a view that the biggest world event in 2001 was not the attack on the World Trade Centre but rather China’s entry to the World Trade Organisation that year, the Commissioner said, “I think that we have to create a system of reciprocity with China. Huawei has offices in Europe; they have researchers and apply to my programme and get money from European science. On the other hand, a Portuguese, Spanish or French company goes to China and cannot access money from the Chinese authorities. There is no reciprocity and we should stop that” he stressed.
The Commissioner pointed out that it wasn’t a level playing field and the rules of the game had to be changed. Moedas said that the EU was the biggest public procurement market in the world – Europe’s GDP stands at around €14 trillion with a €2 trillion public procurement market. “We have to create more rules about who has access to that market, examine if it is fair access and put European companies first.”

Text: Chris Graeme