The Financial System of the EU and the Capital Markets Union

Abstract

1. Introduction The economic crisis has had a big impact on the financial system in the European Union. Financial risk has to be monitored and supervised more closely. For the European Central Bank, the market for a given set of financial instruments and/or services is fully integrated if all potential market participants with the same relevant characteristics (1) face a single set of rules when they decide to deal with those financial instruments and/or services; (2) have equal access to the above mentioned set of financial instruments and/or services; and (3) are treated equally when they are active in the market (Baele et al., 2014, Thalassinos et al., 2010, Thalassinos, Ugurlu & Muratoglu, 2012). This paper will provide a comprehensive overview regarding the structure of the financial sector in the European Union. The financial system has an important role in financing and stimulating the economy. I will try to highlight the mechanism in which credit is mobilised and answer some key questions like who is providing the funds/credit, where does this credit go to and in which form the credit is formalised or through which channels financial resources flow. Also, this paper will provide an overview for the development of the Capital Markets Union (CMU). The Capital Markets Union is a plan of the European Commission to create more flexible and more integrated capital markets for the European Union (Abiad, Dell'Ariccia and Li, 2011, Thalassinos et al., 2013 and 2014). With the CMU, the Commission will explore ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses, particularly SMEs. The investment plan for Europe aims at reversing the drop in investment to fuel the EU's recovery and meeting the long-term needs of the European economy (European Commission, 2015a). 2. Features of the European financial system In the European Union and in the United States there are 15.000 companies that have access to capital markets by issuing either shares or bonds. But there are more companies that finance their activities by other means. These types of companies are approximately 25 million in the EU and about 5.7 million in the United States. The economy is financed by a variety of sources. For example start-up companies such as family businesses are born by the resources generated at inception and the retained earnings in the future years help them with the needs of capital. Also some advantages offered by suppliers and customers can by consider short term financing. Companies can also be financed by inter company loans, bank loans, government loans, etc. In order to understand the financial sector in the European Union, we should map the channels through which financial resources move. It is important to understand who is providing these resources, to whom they are targeted and with which instruments or products. The financial market in the European Union is bipolar. We have on the one side the Western markets that are all very developed, with many years of tradition and free capital movement and on the other side the Eastern European financial markets that are not so well organized and with not the same capital resources. In the figure below one can observe the channels through which financial resources move (direct financing through markets, direct financing outside capital markets and intermediation) from the providers of funds to the users of funds. There are different financial channels through which different entities (households, companies, governments, etc.) can get financial capital to fulfil their investment plans. Figure 2 presents all dimensions of the financial relations in a certain economy. It also highlights all the different actors that help finance the needs of different entities in an economy. …