Far from a lofty utopian vision – bearing in mind the UK’s Conservatives backed the project before Brexit – the CMU involved both grand objectives and a series of small changes to facilitate the cross-border flow of capital.
As well as integrating disparate financing markets, the aim outlined in 2014 by Juncker was also to cut the cost of funding for small and medium-sized businesses, reduce reliance on bank funding and make Europe more attractive as an investment destination.
These worthy objectives remain important and Christine Lagarde, president of the European Central Bank, has reiterated the need for the completion of CMU. More technical reforms, such as improved bankruptcy rules and a consolidated tape, still need to be progressed, she pointed out in speech last autumn.
Europe must also deal with the consequences of an ageing society while readying itself for the energy transition. Simultaneously, it must eke out growth where it can, and nurture its successful venture capital sector. Europe, including the UK, must face the gravitational force of the US’s deep and attractive listings markets, which too often draw innovative companies to American shores.
European Parliament elections this summer are more likely to focus on migration than capital markets reforms and populist politicians with simplistic arguments will doubtless receive a sympathetic hearing from those who present immigration solely as a problem.
Immigration needs to be presented as the complex challenge that it is – and also the solution to some challenges. No-one rational would want to restrict highly skilled people from contributing to European economic growth and prosperity. At the same time, workers are needed in areas like health and social care and agricultural work, where the existing workforce is often unwilling to step in.
Germany’s wave of immigration in 2015 has been far from the catastrophe originally feared. The economic research institution Institut der deutschen Wirtschaft (IW) found in 2022 that Germany will become increasingly dependent on skilled immigration for its economic success.
In 2019, one in six skilled German workers were foreign born and a quarter of university graduates aged 25-34 were immigrants. As well as contributing through taxation, these people also make a positive contribution to state pay-as-you-go pension finances.
Everyone should be given access to a tax-advantaged workplace pension scheme – and that saved capital should be channelled towards productive investments, including European venture capital or private long-term investments.
We will need bolder initiatives than the insipid Pan-European Personal Pension (PEPP) initiative, which has been a singular failure. IORP III would do well to turbo charge the development of a high-quality workplace pensions policy. Why not a Green Paper just dedicated to supplementary pensions and long-term savings?
Household savings are too concentrated in bank deposits and other low-risk holdings. Higher interest rates mean initiatives such as the European Long-Term Investment Fund should be reviewed and while it might be hard to turn French and German housewives into enthusiastic equity investors, there should be better pillar-three pensions and general investment products.
Basel III banking reforms are part of a long-term shift towards safer banks. Banks, the traditional providers of growth capital in Europe, are therefore set to remain constrained from a balance sheet perspective.
But if Europe and wider society want safer banks, there also need to be alternatives to lending and reforms to boost funding from non-bank sources. Pension funds could step in, many of which have long embraced private markets strategies such as direct lending. Exposure to private credit through specialist managers is likely to continue.
Measures to boost securitisation – and to allow pension funds to participate – will be crucial. Here, banks continue their core function of credit intermediation, but securitisation allows pension funds to earn a risk premium from warehousing tranches of loans. With their balance sheets freed up, banks can continue their core role.
CMU is sadly unlikely to feature highly in this year’s election campaigns but the next Commission should not neglect it. And pension funds play a crucial role in implementing the CMU, as well as securing Europe’s future prosperity.
Liam Kennedy, Editor
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