Capital Markets Union key to greening Europe
In the absence of a real capital market and a banking union, the European Union will not be able to mobilize the financing it needs to support its green and digital transformation. Europeans must once again turn a crisis into a momentum for deeper integration
Jean Monnet, architect of the European Union, once said that European unity “will be forged in crises, and will be the sum of the solutions adopted for these crises”. The past decade and a half has provided further confirmation of Monnet’s prediction. Contrary to the predictions of many prominent economists, the EU’s Economic and Monetary Union survived the euro debt crisis and is still doing well thanks to the European Stability Mechanism. The Juncker plan helped put the European economy back on track and Brexit, far from breaking the EU, brought it closer.
The EU is once again proving its worth in the Covid-19 pandemic. Outstanding researchers at BioNTech developed a leading vaccine in record time, and the joint purchases made it possible to distribute the vaccines fairly and efficiently (despite some initial difficulties), ensuring relatively high vaccination rates in many states. members of the EU. The recovery plan and the European Guarantee Fund are now helping economically weaker states and regions to cope with the consequences of the pandemic.
Since 2000, the EU has repeatedly demonstrated its ability to provide solutions and show solidarity. But the relentless search for quick solutions to acute crises has a major downside: the completion of the European single market has fallen to the bottom of the political agenda. Such issues at EU level played no role in this year’s German election campaign, although a strengthening of the single market is crucial to cope with increased economic competition from the United States and China.
Europe is simply not realizing its potential. The EU already has a single market for goods, but not a fully functioning market for services, especially in the otherwise booming digital economy. If a Silicon Valley startup develops a good product, it has immediate access to a huge domestic market and can grow to the point that it can sustain itself globally. But in Europe, that same start-up would have to spend its early years dealing with so many foreign tax specialists and domestic regulators that international expansion would hardly seem worth it.
Europe also lacks a capital markets union and a true banking union; and because there are significant regulatory differences between EU countries, European shareholders and corporate bond investors avoid offers across their own borders, potentially forgoing more investment opportunities. attractive. This highlights the need to complete the banking union, which includes common banking supervision, a bank settlement mechanism and a shared deposit guarantee.
European governments also need to overcome their skepticism about securitization, which is a key part of the Capital Markets Union. It is true that pooled loans triggered the 2008 financial crisis; but that’s only because no one was watching them. With better regulation and supervision, securitization can be a powerful tool for banks to unlock additional capital for new business loans and finance investments in green technologies.
The European Commission has done well in developing an ambitious strategy for a green and digital transformation of the EU economy, sending an important signal to the rest of the world. But the absence of a competitive capital market jeopardizes the ambitious climate goals of Europeans. Massive investments are needed this decade to transform energy, transport, vast swathes of industry and millions of properties, as well as to protect European citizens from the devastating effects of climate change, which have manifested themselves in the last two years. are.
These goals will only be possible if governments work with public and private sector banks to attract private investors across borders. Europe needs to close a climate finance gap of 350 billion euros (US $ 401 billion) per year for at least the next ten years. We may have gotten used to governments and central banks providing huge sums of money to support the economy, but it won’t last forever. Interest rates will not stay so low over the long term, sovereign debt will reach its limits, and higher taxes will not be enough to finance this unique transformation in a century.
But the EU already has the tool it needs to close the gap: it just needs to create a real capital market and a banking union. We can see what is achievable with common rules if we look to sustainable funding. With the issuance of the first green bond, the European Investment Bank (EIB) has given a significant boost to the green and sustainable bond market. This has resulted in a uniform market understanding of what constitutes a green or sustainable bond.
In addition, with the EU taxonomy, there are now transparent criteria to determine which economic activities are already green or can develop in this direction. Investors have a clear set of rules to use as a guide for sustainable financing. This transparency at EU level is a huge step forward, turning a once ridiculed idea into a â¬ 2 trillion market.
With a true Capital Markets Union, the EU would expand the possibilities for financing businesses and attract capital from all over the world, and the euro could become truly competitive against the dollar. Currently, European businesses are too heavily dependent on loans, with private sector banks like Deutsche Bank providing 80% of corporate finance. While banks will make a vital contribution to the green and digital transformation of the private sector, they alone cannot meet the enormous financing needs.
While 60% of US companies obtain financing from the capital market, only 20% of EU companies do so. If more European companies could do this, huge amounts of investment would be freed up. European startups would not have to look for American investors during their growth phase. And European pioneers like BioNTech (which received EIB seed funding) would not need to look to the Nasdaq when their financing needs reached hundreds of millions of dollars.
If Monnet’s belief about the EU is true, the climate crisis will be the next step towards deeper integration. Europe’s green and digital transformation can only be successful if it goes hand in hand with the completion of the single market, including a capital market and a banking union.
Christian Sewing is the CEO of Deutsche Bank and Werner Hoyer is the President of the European Investment Bank.
Copyright: Project Syndicate