How a European Capital Markets Union could Affect Global Markets
And why you probably haven’t heard about it.
The creation of a European Capital Markets Union (CMU) has been a sleepy subject for a decade, but one that should no longer be overlooked. Today (May 27, 2024), French President, Emmanuel Macron, is on the first official French state visit to Germany in 24 years. What makes this visit important is that CMU is high on the agenda.
A Capital Markets Union would allow European investments and capital to flow more efficiently across the European Union and abroad, enabling companies and investors to more easily raise capital and take profits. Most would say that the free movement of capital has existed since the Maastricht Treaty had been ratified. But EU capital markets remain largely fragmented, with different rules, taxes and incentives making the European capital market anything but free and open.
A personal example. As a retail investor in Belgium, if I bought shares in a German utility, my dividends would be taxed twice leaving me with less than 50% of the company’s payout. The same double taxation exists in France, and while there is a means to retrieve a percentage of the funds, it is not worth the time unless I were a billionaire. I can, alternatively, buy those shares via an Estonian investment app, also save having to pay the stamp duties, but in 18 months, my accountant will have to be creative. Many Belgian investors then put their savings into US growth (tech) stocks where there are easy ways around any capital gains taxes. I am not sure there are many outside of the EU (or inside) who would want to invest in such a complex environment.
Since 2015, CMU has been defined as a priority and then placed firmly on the back shelf in the EU policy process. In 2020, the commitment was renewed with a new CMU Action Plan, and then, again, little momentum.
So what has changed to make CMU a main talking point between the leaders of Europe’s two largest economies?
With Brexit, the City of London is losing its leadership position in European capital markets. Macron has been pushing for Paris to take its place (hence his reason to cajole a weak German leader).
As the dollar is losing its role as the global currency (dedollarization, Chinese shifts out of US treasuries, uncontrolled debt, crypto markets…), there are clear opportunities for the euro.
The Post-COVID recovery required significant market-based financing to fund the recovery and return the EU markets to growth. This has only marginally materialized.
The EU has launched the digital and green transition strategies that will require significant investments from capital markets.
Aging populations will otherwise strain European Member State finances.
The Future is Green
There are significant challenges for Capital Markets Union to become a reality with certain EU Member State resistance anticipated (especially over taxation issues). I suspect CMU will develop much like the euro, with certain countries taking the lead in an evolutionary process of countries joining a single European capital market by committing to a set of standards. Today, the French president is in Germany hoping there will be at least two countries in that group.
In Europe when change happens, it might take decades of talk but then can happen quite fast, so it is very possible that other countries will follow the German-French lead very quickly.
More interesting is how non-EU companies and investors may be able to benefit. A common European capital market will create safer havens for non-dollar investments, more efficient, transparent trading opportunities with less bureaucracy and double taxation. Companies will be able to raise capital in Europe from wider investment pools and without the present market fragmentation.
Not Sexy Enough to be News
What is sad is that this market opportunity is not being covered by the business news groups. Maybe it is not sexy enough in a world where the media can only focus on the quarterly results from some magnificent seven group of companies, what (or whom) Elon Musk ate for lunch or anything with the words “Artificial Intelligence”. The recent obsession with suggestions made during US Federal Reserve press conferences or speeches from the Fed presidents has distracted the media from covering real market-moving news. By the time the media picks up on the trends, the real money has been made and the small investors get smoked. Business news has become nothing more than a ‘show’ with characters like Jim Cramer needing louder bells and whistles to capture audience attention.
Business news has been one of the few places within the media empires that is still making money with groups like the Financial Times, Bloomberg, CNBC and the Economist maintaining or even growing their reader or viewerships. But it is hard to get very deep into business analysis when ratings and clicks take over.
For example, the business media have been focusing on the imposition of (political) trade restrictions on China without identifying how China has repositioned itself in other markets, how they have stopped purchasing US debt (and the potential risks for the dollar) and how they are controlling the supply chains for the green transitions. Retail investors who focus on the sexy business news will likely lose their shirts in a rather unsexy way.
So too with the potential to move markets and capital with the implementation of a European Capital Markets Union. What this means for the global movement of finance, currency realignments and trade is extremely important. What this means for the US dollar, dollar-based investments and the continuation of advantages that American businesses had enjoyed is extremely important.
But maybe not as important as Elon Musk’s lunch.