The EU must strengthen the competitiveness of its financial markets

By Pablo PortugalChief Advocacy Officer, Association of Financial Markets in Europe (AFME)

EThe European economy is following another unpredictable trajectory. The outbreak and resurgence of the COVID-19 pandemic over the past two years and now the economic impact of the war in Ukraine underscore why the European Union (EU) needs a resilient and diversified financial system capable to withstand sudden economic shocks. In the meantime, the financing needs associated with the green and digital transitions remain more urgent than ever: the European financial system must be adapted to channel the scale of the investments needed to enable these transformations.

Capital market financing will have to play a central role in meeting these challenges. Yet EU capital markets remain fragmented and undersized. Deepening integration and widening the international reach of EU capital markets are therefore essential for Europe’s economic prospects and overall strategic objectives.

European capital markets and regulatory frameworks continue to evolve in the post-Brexit environment. Major legislative proposals with the potential to have far-reaching impacts on the European banking sector, the capital markets ecosystem and the advancement of sustainable finance are under consideration.

In light of these changes, the EU must seek regulatory outcomes that not only preserve and enhance financial stability and investor protection, but, above all, encourage greater participation by local and international players in EU capital markets. EU. A strong emphasis on this principle will be essential to further develop the EU’s capacity in primary and secondary capital markets.

Increasing market competitiveness will be vital for Europe’s economic strength

Financial markets in the EU – or any other jurisdiction – do not operate in isolation. They are interconnected and financial centers around the world compete with each other. This is especially true for wholesale markets where sophisticated investors and market participants are themselves active in multiple jurisdictions and have choices to make regarding the deployment of their capital and access to pools of liquidity.

This is why policy making should contribute, as far as possible, to enhancing the attractiveness and competitiveness of EU capital markets. This, in turn, will support ongoing efforts to develop the Union’s market ecosystem, promote the international use of the euro and achieve greater strategic autonomy in financial services.

To advance this objective, EU authorities could consider integrating the promotion of competitive and efficient European financial markets into the mandates of the European Securities and Markets Authority (ESMA) and other authorities, alongside their existing main mandates. The importance of competitiveness manifests itself in a number of areas. For example, an efficient and competitive securities trading ecosystem leads to better outcomes for end users and is important for attracting global market players and promoting the growth of EU financial centres.

Promote international cooperation and regulation supporting market development

Successful major global financial centers are characterized by their high regulatory standards, the quality of their legal frameworks, openness to global pools of capital, and the breadth of their underlying financial ecosystems.

Maintaining openness and connectivity with non-EU markets is essential to continue to build EU capital market capacity. The EU should continue to champion open capital markets that allow EU participants to access international capital pools and funding opportunities while ensuring market integrity and fair treatment between businesses EU and third country entities.

In addition, greater emphasis must be placed on supporting global regulatory cooperation, particularly in the areas of digitalization and sustainability, as jurisdictions grapple with common goals and challenges. It is in the interests of European businesses and investors to have globally harmonized standards while preserving the EU’s strong and ambitious leadership role in these areas.

Strengthening Europe’s primary and secondary markets

The EU is at a critical moment in its decision-making regarding the future of its capital markets. The next two years will see the advancement and completion of major policy debates in areas such as market structure, prudential requirements for banks, sustainable finance and digitalisation, which will have the potential for significant change.

For example, as the EU competes with other global markets to attract company listings, attractive and harmonized listing rules on European public markets will be essential to support crucial access to market finance for EU companies. The EU is therefore undertaking a comprehensive review of company listing rules to encourage more companies to list on EU public markets, especially small and medium-sized enterprises (SMEs). This should ensure that high levels of legal certainty, transparency and investor protection are maintained.

Meanwhile, lawmakers are currently debating a set of major and potentially transformative proposals for European secondary markets under the ongoing review of the Markets in Financial Instruments Regulation (MiFIR), which governs the functioning of markets. . This work is essential to promote globally competitive capital markets in the EU.

An attractive and well-regulated trading ecosystem can foster innovative and world-leading market infrastructures and promote expanded liquidity pools within the EU. Promoting market efficiency, competition between service providers and strong outcomes for corporate and SME investors and issuers should be at the forefront of the debate around these proposals for the structure of the European market.

In this respect, the proposals for setting up a consolidated ribbon, similar to a price comparison for investors, should be particularly supported. A well-designed band will foster more attractive and competitive capital markets and reduce home country bias (where an investor tends to prefer companies or investments from their own country) in the Union.

As these debates progress, it is important to consider the broader international context, including, for example, the UK’s parallel review of its wholesale market architecture. As the EU reviews its own market legislation, if there is a move towards a market structure which ultimately is less favorable to investor choice and prevents investors from accessing the most optimal trading conditions, this will not only lead to additional costs for pensioners and savers, it may also discourage global market players from participating in EU capital markets, undermining their competitiveness vis-à-vis other jurisdictions.

Now is the time to complete the CMU

In conclusion, EU capital markets have many strengths that enable them to thrive in today’s global environment, including the scale of the EU single market, the euro as a premier international currency plan and global leadership in ESG (environment, social and corporate governance) financing.

In the recent Versailles Declaration, EU Heads of State agreed to create an environment that facilitates and attracts private investment by “creating more integrated, attractive and competitive European financial markets, enabling the financing of innovation and preserving financial stability, deepening banking capital markets (BMUs) and completing the banking union.

These goals are achievable and within reach, but the EU needs to find the political momentum to implement policies that will foster a globally competitive Capital Markets Union capable of supporting long-term sustainable growth. term in the years to come.

ABOUT THE AUTHOR

Pablo Portugal is Managing Director of Public Policy and Advocacy at the Association of Financial Markets in Europe. His main focus is market analysis and regulatory development across Europe in securities markets and banking areas. Pablo is also a board member of the European Capital Markets Institute.