On 29 January, European Commission President Ursula von der Leyen officially presented the Commission’s Competitiveness Compass, an overarching plan to fix Europe’s competitive weaknesses. Key to the plan is the long-discussed but never-completed Capital Markets Union – rebranded last year as the Savings and Investment Union – an initiative that aims to build deeper capital markets offering funding to companies, returns to savers across the European Union and financing for economic growth. The Commission has earmarked the SIU as a key “enabler” for ultimately funding the EU economy.
First proposed by former Commission President Jean-Claude Juncker in his 2014 State of the Union address, the Capital Markets Union/SIU initiative has striven to create a single market across the EU.
As Juncker said, “The Capital Markets Union is not just a project; it is a necessity for Europe’s future. It is about ensuring that the EU has a deep and integrated financial market that can support investment, innovation and growth.”
Progress has been slow, with member states clashing over issues like single supervision and cross-border taxation. While many have opined on the best path forward to achieve the SIU, two former Italian prime ministers stepped forward with their respective views in 2024. Enrico Letta, having led his home country from 2013 to 2014, presented his view in a high-level report on the future of the EU single market in April 2024.
“The lack of integration in the financial, energy and electronic communications sectors is a primary reason for Europe’s declining competitiveness,” Letta noted. “We’re in danger of falling out of touch. There is no time to waste. The gap between the European Union and the US in terms of economic performances is becoming bigger and bigger.”
Perhaps foreshadowing the difficult road ahead, Letta discussed how rail networks work well within national borders, but Europe has “not even managed to connect the three main European capitals of Brussels, Strasbourg and Luxembourg.”
Nevertheless, Letta makes the salient point: “By fully integrating financial services within the Single Market, the Savings and Investments Union aims to not only keep European private savings within the EU but also attract additional resources from abroad.”
Fast forward five months and Mario Draghi, the former European Central Bank President who more recently led his country from 2021 to 2022, released a long-anticipated report on EU competitiveness.
Draghi estimated that Europe must increase green, digital and defence investments by €800 billion per year if its economy is to remain competitive with China and the US. Without extra investment, the EU will have to “scale back some, if not all, of its ambitions” and be left behind, he warned.
At the heart of the report is a demand for building out the EU’s SIU as a major source of funding for the bloc’s political priorities.
On steps to help mobilise private finance, Draghi recommended transitioning the European Securities and Markets Authority from a coordinator of national regulators into a single regulator for all EU securities markets – like the US Securities and Exchange Commission – with the aim of cutting through nation states’ self-interest and pushing an agenda of securities investment across the region.
For this purpose, ESMA should be entrusted with exclusive supervision over nonbanks, including large multinational issuers, major regulated markets with trading platforms in various jurisdictions and central counterparties, the report said.
So far, member states have staunchly resisted proposals to centralise financial market supervision, which some view as a ruse by France, where ESMA is based, to gain greater control over their capital markets.
Draghi also addressed centrally cleared derivatives markets more directly, proposing that the EU should ultimately have a single pan-European clearinghouse and a single central securities depository for all securities trades. Consolidation of clearinghouses and CSDs should start with the largest players, with smaller ones joining afterward, the report said.
These suggestions largely landed with a thud, just as previous proposals for a single clearinghouse have dating back to the early 2000s.
Will they, won’t they?
The reports have defined the challenges and opportunities well. The media coverage has quoted all the key politicians across Europe, and the Commission’s von der Leyen has kept with tradition in labelling the SIU a critical policy priority.
Similar to Juncker, von der Leyen highlighted the SIU and the challenges ahead in her 2024 State of the Union Address. “While it is crucial to Europe’s future, achieving it requires overcoming deep-rooted challenges. The most significant obstacles are the fragmented financial regulations across member states and the resistance to harmonisation of certain financial market practices. It will take time, but we remain committed to making it happen.”
As this article was going to print, much anticipation rested with the 19 March publication of the Commission’s dedicated SIU Action Plan.
For Europe to secure a sustainable, future-ready financial system, the creation of an SIU must be more than just an incremental change – it must be a transformational leap.
Will nation states relinquish some regulatory sovereignty in the name of streamlining processes that might attract more capital and investment to the broader EU?
Only time will tell.
