Mutual funds are the key to a true union of capitals in Europe

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The writer is executive director of the Center for European Political Studies in Brussels

Not a week goes by without EU politicians repeating the need for more financing of the capital markets in Europe. They argue that the enormous costs of the green and digital transitions cannot be financed from state funds alone. They are correct, but that’s where it stops. There are no concrete proposals.

This is because those same politicians defend national territories. The Capital Markets Union, launched in 2015 to stimulate the creation of a pan-European market for investment and trade, remains an abstract notion. Although many harmonization measures have been taken, the development of the market is still very uneven across the continent and has not progressed at all in southern and eastern Europe.

Last year’s listing of the car manufacturer Porsche worth 75 billion euros is a good example. This could have been a showcase for the start of an EU-wide IPO market. Instead, it was kept within German borders and at a very low free float.

If the EU wants to build a deep and liquid economy capital markets that rival those of the US, then it is time for the politicians to start killing some sacred cows. They need to take drastic measures to increase the amount of investment by European households in the continent’s capital markets by making the mutual fund markets more attractive.

Today, Europe’s fund markets are hopelessly fragmented, leading to high costs and lower acceptance. The average fund size in Europe is €300 million, or about a tenth of the average US fund. Fund costs are opaque and high, making price competition difficult.

Private equity and venture capital are also still very underdeveloped in Europe, which affects Europe’s competitiveness and makes European success stories like Spotify or BioNTech list in the US instead.

A sweeping reform could allow Europe’s fund and capital markets to double in size, with households investing excess deposits more wisely and perhaps also more safely over the long term. Directing more savings to companies could also help the elderly in retirement, an acute problem in most EU member states, as well as reduce bank balance sheets and create more liquidity in markets.

The EU should prioritize the development of its individual capital markets before attempting to fully unify them. Stronger local capital markets are a prerequisite for a broader capital market in the EU. This, however, would require a regulatory framework that is flexible and adaptable. Very complex and detailed rules may not suit smaller markets. The European Securities and Markets Authority (ESMA) must be allowed to exert more pressure to ensure that the same principles apply across the bloc and that mutual recognition is enforced.

But in addition to stimulating the development of local markets, the EU should move towards supervision of the entire bloc when necessary. In recent proposals for EU-based clearing infrastructure, the European Commission left supervision of its 13 central counterparties decentralized. He should have proposed a single supervision of such highly systemic and concentrated entities.

EU-wide licensing would also make more sense for multi-market capital-raising offerings and create a deeper market. Investor protection rules need to be mutually recognized to enable truly pan-European capital raising exercises.

Equally important is having easily identifiable metrics that facilitate better monitoring and evaluation of progress towards the goal of creating a deep European capital market and overcoming fragmentation.

It is necessary to establish a comprehensive set of key performance indicators on the competitiveness of EU players, the relative attractiveness of EU capital markets and the efficiency and effectiveness of supervisory structures. A few indicators on the degree of financial integration are not enough. Similarly, a high-level group of experts should be required to report regularly on market developments to policy makers.

These issues are also important given concerns about bank health that have resurfaced since the collapse of Silicon Valley Bank in the US and the bailout of Credit Suisse in Switzerland. A deeper and more attractive capital market across the EU would give smaller investors more options for their money at lower cost, better growth opportunities for fast-growing European companies, and result in less volatile markets.

Apostolos Thomadakis also contributed to this article.