Summary of Comments on the European Commission Green Paper 'Building a Capital Markets Union'

Abstract

European SMEs rely predominantly on bank credit to fund investment and operating capital, with direct lending markets (bonds) and equity markets both underdeveloped across the EU compared to the US and the UK, as well as other jurisdictions. In addition, there has been a significant decline in investment during the current crisis (from 2007-2008 through present). In its Green Paper, the EU Commission sets key targets for policy interventions under the proposed Capital markets Union (CMU) that are both well-intentioned and occasionally contradictory to the stated objectives of the reforms. Crucially, however, the EU Commission presents no substantive case for the main thesis that underlies its proposed reforms, namely that greater degree of capital markets harmonisation is needed to alter the composition of sources of funding for European SMEs and to increase supply of liquidity and funding to the sector. This problem is compounded by the lack of detailed analysis of the potential impact of the measures underpinning the creation of the CMU. Absent clarity and standard risk-return analytics to support any of the policy priorities and/or proposals under the CMU, the EU Commission appears to be cherry picking specific priorities relating to investment to suit its case in favour of the CMU, without considering any other priorities, including those that should form a basis for more efficient and more effective first-best reforms.