ENHANCING EU CAPITAL MARKETS

Joint statement from the Conseil d’analyse économique (CAE), the German Council of Economic Experts (GCEE) and the Franco-German Council of Economic Experts (FGCEE)

Authors are:
Camille Landais, David Sraer, CAE
Monika Schnitzer, Veronika Grimm, Ulrike Malmendier, Achim Truger, Martin Werding, GCEE

The European Union needs to build stronger and deeper capital markets to finance opportunities such as the green transition or the rise of artificial intelligence, and to promote the resilience of EU economies in the face of financial shocks. Deep and liquid capital markets are essential to ensure long-term growth and to overcome the decline in the growth potential of European economies. Market-based financing encourages investment in new, riskier technologies and in research and development. However, Europe's financial architecture is still predominantly bank-based with largely national flows.

We propose five policy measures to support a growth-oriented CMU agenda.

To simplify the valuation of financial assets, the EU should extend the European Single Access Point (ESAP) initiative to private companies. In addition, improving and harmonizing national insolvency regimes can reduce costs, better allocate resources and encourage cross-border investment.

To enhance the effectiveness of its supervision and to make it more conducive to market integration, the EU should strengthen and reform the European Securities and Markets Authority (ESMA). The redesign of ESMA's governance should include a compact executive board with sole authority over all administrative and supervisory decisions, and its activities should be funded primarily by a levy on the entities and market segments it supervises.

Strengthening supplementary funded pensions could increase the amount of capital raised by institutional investors and invested in equity markets and as a result improve the depth of capital markets. Differences in national supervisory culture and practices may be the main reason for the equity-averse investment choices of insurers in some European countries. Deepening European supervisory integration through a reform of the EIOPA could harmonize supervisory culture.

To foster the development of the EU venture capital (VC) market, the EU and Member States should increase public co-financing. This can be achieved by increasing funding to the European Investment Fund (EIF) and the European Tech Champions Initiative (ETCI).

To build household confidence and participation in capital markets, the EU could introduce EU-funded investments accounts for children. This would allow children to experience different financial cycles and understand the long-term low risk and high reward of investing in equities.