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If Europe wants to stay ahead of the curve and be able to follow – and eventually lead – its international counterparts, the new European Commission should have a focused agenda that balances regulatory simplicity with forward-looking strategies. This is particularly the case in capital market integration, bank competitiveness, digital finance and sustainability.
Over the past few decades, Europe’s financial system has grown in size and complexity but remains largely bank-centric compared with more market-oriented systems. Important efforts have been made to diversify, deepen and integrate the EU’s financial markets, including significant legislative initiatives like the Capital Markets Union (CMU) and the Banking Union.
Progress remains uneven and has stalled in some areas. Europe continues to grapple with fragmented banking systems and market infrastructures, and inconsistent regulatory enforcement across Member States. As highlighted by both the recent Letta and Draghi reports, this inconsistency causes competitive imbalances, hampers the effectiveness of the European financial market, leads to financial instability and reduces investor confidence.
For Europe to meet its ambitious goals in achieving the green and digital transformations, as well as strengthening strategic autonomy, huge investments are needed. This investment gap cannot be bridged by public funding and bank financing per se. Equity markets, private debt and capital should be mobilised. However, a well-functioning capital market requires the clear oversight of all actors involved (e.g. issuers and investors, infrastructures, intermediaries and institutional investors).
Yet despite the deluge of rules enacted since the mid-1980s, harmonisation simply isn’t enough. There is still much room given for national enforcement powers which paves the way to gold-plating and significant asymmetries in supervisory practices.
Consequently, EU capital markets lag behind other international markets. Europe has a low share of global equity and corporate bond markets, and fewer risk-capital investments. While the CMU has led to some improvements, hurdles like limited integration and low participation levels by retail investors remain, requiring further regulatory action to increase market depth and investor confidence.
For CMU to flourish, a well-functioning Banking Union should go hand in hand. Europe’s banking sector, although large and well-capitalised, suffers from lower profitability, fragmented regulations and valuation disparities when compared with global counterparts. Yet despite the work of the European Central Bank and the European Single Supervisory Mechanism, the Banking Union still isn’t complete. There is no single rulebook for banking in the EU....
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