Author: Paul Tang
The initial CMU action plan, presented in the autumn of 2014, was anything but a blueprint for financial reform but rather a hodgepodge of actions that are up for grabs. Even then, expectations for the future of CMU are low. The Commission may blame it on the withdrawal of the City of London and the lingering insecurity around Brexit, but ultimately it should consider its own responsibility. The mixed bag of priorities it identified is a dead end road. Real challenges remain unaddressed. The only way to seize the opportunity of a better CMU is to drastically change its direction.
The start of the CMU project was awkward, to say the least. The ambition was to facilitate a smoother allocation of cross-border finance and unlock new investments. So far so good, but the top files the Commission identified to reach these goals were quaint. Securitisation was deemed to be a flagship of new investment for citizens, but in practice the repackaging of loans had mostly proven to work to the benefit of banks and to be a potential doomsday machine for society. An overarching story of how the CMU would contribute to a more stable financial landscape in the service of citizens and SMEs was, and is, lacking.
It sometimes gives the impression that the CMU project is being developed in an alternative universe. A universe where the over-leveraged financial system is not plagued by fragmented supervision and a jungle of products. A universe where the fact that 80% of EU lending is provided through banks and not through capital markets can be disregarded.
Earth to the Commission. The biggest challenges the financial system is facing currently remain largely unaddressed. For a start, removing the debt bias is a real boost to a capital market. Debt financing is favoured via the tax-deductibility of interest-payments. This is a de facto subsidy to financing via debt, and forms a major distortion for the financial system. The issue should now be dealt with in the context of CCCTB, by making debt more expensive and/or equity cheaper.
Second, a European capital market requires European supervision. Brexit can be an opportunity to revamp the debate on supervisory convergence throughout Europe. Regulatory competition, in which Frankfurt, Paris and Amsterdam try to lure British companies with the promise of a beneficial regulatory regime, should be avoided. Instead, the EU-27 must stick together to overcome supervisory fragmentation and create a more stable financial environment.
Thirdly, a green dimension is needed. The Commission should not only draw lessons from the crisis of yesterday, but should also leave us well-prepared for the crisis of tomorrow. The European Commission has estimated that to finance clean energy and energy efficiency investments alone, €200 billion of annual investment is required. These investments can be triggered if policymakers create the right conditions and incentives, for instance by including ecological and social standards in legislative financial files, running carbon stress tests and introducing standardised definitions.
And finally, while the US heralds a regulatory race to the bottom, the EU should make clear that it will not take part in this game. We must unite. Any financial institutions that want to do business in Europe must play by our rules. A black list for tax havens can be a start but also a leading example for how the European Union contributes to a global economic order. Criteria for sustainable investment can be another possible example.
If the EU wants to be a trend-setter in global financial regulation, it must dare to make a leap. Concretely, the Commission must break the debt dependency of the European financial model, overcome regulatory fragmentation and tackle the financial and environmental problems of tomorrow.
That means the Commission faces a choice when it presents it midterm review in June. Either it breaks through the dead end road, or it backpedals. The latter may seem more pragmatic and more comfortable. But in times of lingering under-regulation and mounting external threats, Europe will surely be better served by a more ambitious CMU.