Jean-Claude Juncker launched the idea of a Capital Markets Union (CMU) on 15 July 2014 in a speech before the European Parliament. The objective was made plain in the title of Jonathan Hill’s portfolio as “European Commissioner for Financial Stability, Financial Services and Capital Markets Union.” Juncker has not really fleshed out the CMU idea in his speech, and much discussion has been going on recently to simply try to define what the CMU possibly entails. What is particularly striking about this CMU discussion is that it is a rather old topic of debate within the EU – one that first emerged at a time when the European financial puzzle was set very differently.
The issue of EU capital movements is as old as the EU itself. The freedom of capital movements is enshrined in the Treaty of Rome (title III, chapter 4); other issues linked to financial integration can be found under the remit of the freedom of establishment and the free movement of services – this is in fact from this standpoint that the “banking union”/banking integration discussions had started in the 1960s. But no single financial integration chapter existed in the Rome Treaty. The so-called Segré Report (named after the expert group’s chairman, Claudio Segré, director for studies in the Commission’s directorate-general for economic and financial affairs) on “The Development of a European Capital Market,” published in November 1966, represented the first attempt to draw a comprehensive study of the problems confronting the capital markets of the then European Economic Community.
The reason why the EU’s predecessor, the EEC, started looking into capital market integration in the 1960s are quite different from today’s preoccupations. The idea of creating an environment more conducive to growth was of course present:
Market mechanism contribute best to economic growth and to the equilibrium of the economy when they operate within the framework of policies reflecting the long-term goals set for the economic and social systems. (…) In all the Member States the financing of economic growth is coming to depend more and more on the capital market, and the establishment of wider markets and close co-ordination of economic policies would facilitate this growth (…).
Nevertheless, in 1966 – that is, during the “Golden Age” of growth in Europe – this dimension was certainly less important than it is today. The second and most important reason for developing European capital markets was linked to the Common market framework: the central task of the expert group that wrote the Segré Report was to study the problems confronting the capital markets of the Community as a result of the implementation of the Treaty. The development of capital markets – as the report’s title made clear – not even their full integration, was the primary aim. Economic integration had grown out phase with financial integration in Europe, the Commission argued, so capital markets should be developed to go hand in hand with what was needed to make the implementation of the common market succeed.
The question of capital markets integration was not given top policy priority, however. Other policy areas were given more important consideration: the completion of the common market and the development of other policies (chiefly agriculture) all represented more urgent issues than capital markets integration. In addition, European policymakers were also in a different mind-set: short-term capital movements were still considered to be destabilising. The late 1960s were still much influenced by the thinking of Bretton Woods; the memories of the interwar period and particularly the Great Depression were still very present.
A trial balloon?
Today’s situation is of course very different: the common market has been implemented, a single currency has been intoduced, many financial innovations appeared since the 1960s… The central question remains constant, however: what it missing in the current set-up of the EU capital market so that the EU economy can function properly? Answers to this question range from the development of funding channels alternative to traditional bank lending to securitisation, from the improvement of the transparency of information to standardisation. The general goals remain similar too, in that the idea is to improve the allocation of capital and to distribute risk more efficiently.
It remains to be seen what the new Commission will actually put under the umbrella term of CMU. The original proposal of Juncker may well have been purposely vague so as to arouse reactions from marketplace actors. On top of this, CMU is likely to involve long-term developments, just as the Segré report had warned: “[developing a European capital market is a] vast operation to be completed gradually over a period of years.” Since this topic was first put on the agenda in 1966 and is still there under another guise in 2014, it has rather been a question of decades.