Capital Markets Union and ending short-termism: lessons from the European Commission's public consultation

Abstract

The European Commission's initiative to establish a Capital Markets Union is in sharp conflict with the more radical goals of downsizing significantly certain financial activities and firms that have become too-big-to-fail and too-big-to-govern and of ending or at least drastically limiting extreme speculation and short-termism in finance and the real economy in order to increase financial stability. The recent public consultation on the Commission's Green Paper, Building a Capital Markets Union gives evidence of how weak such demands are compared to calls for deeper capital markets with more “shadow banking” and rebuilding (sound) securitisation. The consultation is an example of how framing the problem and the refined Better Regulation agenda influence post-crisis financial reregulation and help to marginalise more radical ideas demanding a return to a more traditional banking model and transforming finance back to serving the real economy.

Notes

1 J-C Juncker, “A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change”, Political Guidelines for the next European Commission, Opening Statement in the European Parliament Plenary Session, Strasbourg, 15 July 2014.

2 M Housel, “Two-Speed Recovery: US vs. EU” (2014) (January/February) World Affairs, http://worldaffairsjournal.org/article/two-speeed-recovery-us-vs-eu, last accessed 30 July 2015.

3 The CMU idea is old (see C Segré, The Development of a European Capital Market: Report of a Group of Experts Appointed by the EEC Commission (Brussels, European Economic Community, 1966)) and had already a revival under the previous Commissioner for Internal Market and Services, Michel Barnier.

4 J Hill, “Capital Markets Union – Finance Serving the Economy”, speech, Brussels, 6 November 2014, http://europa.eu/rapid/press-release_SPEECH-14-1460_en.htm, last accessed 30 July 2015.

5 The Single Rulebook consists of the regulatory framework for capital requirements (CRD IV), deposit guarantee schemes (Directive 2014/49/EU OJ L 173, 12.6.2014, 149–178) and bank recovery and resolution (Directive 2014/59/EUOJ L 173, 12.6.2014, 190–348) and builds the foundation of the Banking Union which includes single supervision of the Eurozone's largest banks by the European Central Bank (ECB) and single resolution of the banks falling under ECB supervision.

6 WG Ringe, “Capital Markets Union for Europe: A Commitment to the Single Market of 28” (2015) 9 Law and Financial Markets Review 5.

7 See http://ec.europa.eu/finance/consultations/2015/capital-markets-union/index_en.htm, last accessed 30 July 2015.

8 European Commission, Green Paper: Building a Capital Markets Union, COM(2015) 63 final (Brussels, 18 February 2015).

9 European Commission, Consultation Document: An EU framework for simple, transparent and standardised securitisation (Brussels, 18 February 2015).

10 Directive 2003/71/EC, OJ L 345, 31.12.2003, 64–89 of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, as subsequently amended by Directive 2008/11/EC, OJ L 76, 19.3.2008, 37–38 of 11 March 2008, by Directive 2010/73/EU, OJ L 327, 11.12.2010, 1–12 of 24 November 2010, by Directive 2010/78/EU, OJ L 331, 15.12.2010, 120–161 of 24 November 2010, by Directive 2013/50/EU, OJ L 294, 6.11.2013, 13–27 of 22 October 2013 and by Directive 2014/51/EU, OJ L 153, 22.5.2014, 1–61 of 16 April 2014 (Omnibus II). The prospectus framework also includes the corresponding implementing regulation no 809/2004. For the consultation: European Commission, Consultation Document: Review of the Prospectus Directive (Brussels, 18 February 2015).

11 D Pesendorfer, “EU Capital Markets Union: Tensions, Conflicts, Flaws”, in N Dorn, Controlling Capital: Public and Private Regulation of Financial Markets (Abingdon, Routledge, forthcoming).

12 J Hill, “Capital Markets Union – Finance Serving the Economy”, speech, Brussels, 6 November 2014.

13 J Hill, “Refocusing Financial Integration on Growth and Jobs”, speech, Brussels, 27 April 2015, http://europa.eu/rapid/press-release_SPEECH-15-4861_en.htm, last accessed 30 July 2015.

14 See Pesendorfer, supra n 11.

15 Eg JE Stiglitz, The Roaring Nineties: A New History of the World's Most Prosperous Decade (New York, WW Norton & Company, 2003); EP Lazear, “The Worst Economic Recovery in History”, The Wall Street Journal, 2 April 2012, http://www.wsj.com/articles/SB10001424052702303816504577311470997904292, last accessed 30 July 2015.

16 European Commission, supra n 8, 2.

17 Eg GR Krippner, “The Financialization of the American Economy” (2005) 3(2) Socio-Economic Review 173; S Strange, Casino Capitalism (Oxford, Blackwell, 1986); GA Epstein (ed), Financialization of the World Economy (Cheltenham, Edward Elgar, 2005).

18 Eg AG Haldane, “On Being the Right Size”, speech, Institute of Economic Affairs 22nd Annual Series, The 2012 Beesley Lectures at the Institute of Directors, Pall Mall, 25 October 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech615.pdf, last accessed 30 July 2015.

19 Eg Bank of International Settlements, Quarterly Review March 2015: International Banking and Financial Market Developments (Basel, Bank for International Settlements, 2015).

20 H Banziger, “Did the Globalization of Finance Undermine Financial Stability? Lessons from Economic History”, LSE Financial Markets Group Paper Series, Special Paper 211 (London, LSE, 2012); S Cecchetti and E Kharroubi, “Why Does Financial Sector Growth Crowd Out Real Economic Growth”’, BIS Working Papers, No 490 (Basel, Bank for International Settlements, 2015); M Obstfeld, “Trilemmas and Trade-Offs: Living with Financial Globalisation”, BIS Working Papers, No 480 (Basel, Bank for International Settlements, 2015).

21 B Cournède, O Denk and P Hoeller, “Finance and Inclusive Growth”, OECD Economic Policy Paper, No 14 (Paris, OECD, 2015).

22 Pesendorfer, supra n 11.

23 Ibid.

24 A Rappaport, Saving Capitalism from Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future (New York, McGraw-Hill, 2011).

25 L Quaglia, Governing Financial Services in the European Union: Banking, Securities and Post-Trading (Abingdon, Routledge, 2010), 82.

26 European Commission, Green Paper: The EU Corporate Governance Framework, COM(2011) 164 final (Brussels, European Commission, 5 April 2011).

27 Proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement, COM(2014) 213 final (Brussels, 9 April 2014).

28 D Pesendorfer, “Beyond Financialisation? Transformative Strategies for More Sustainable Financial Markets in the European Union” (2014) 16(4) European Journal of Law Reform 692.

29 See D Pesendorfer, “Financial Taxes and the Sand in the Wheels of Financialization: Legal Challenges for the EU Directive Implementing Enhanced Cooperation in the Area of Financial Transaction Tax” (2013) 2 European Review of Public Law 25.

30 Proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions, COM(2014) 43 final (29 January 2014).

31 European Commission Green Paper, supra n 8, 28.

32 European Commission, Initial Reflections on the Obstacles to the Development of Deep and Integrated EU Capital Markets, accompanying the document Green Paper Building a Capital Markets Union, Commission Staff Working Document SWD(2015) 13, Brussels.

33 European Commission Green Paper, supra n 8, 3.

34 A pan-European, 29th regime would allow businesses to voluntarily choose the European over a national regime.

35 European Commission, supra n 8, 14.

36 European Commission Staff Working Document, supra n 32.

37 Ibid, 33.

38 Ibid, 34. The proposal is the revision of the Directive on the activities and supervision of institutions for occupational retirement provision, COM(2014) 167 final (Brussels, 27 March 2014).

39 J Kay, The Kay Review of UK Equity Markets and Long-tem Decision Making, Final Report (July 2012), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-final-report.pdf, last accessed 30 July 2015.

40 European Commission Staff Working Document, supra n 32.

41 Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, COM(2013) 71 final (14 February 2013).

42 Brookings Institution, “European Financial Regulation and Transatlantic Collaboration” (Washington, DC, Brookings Institution, 2015), 14.

43 The questions are also in the Green Paper, split into the various sections.

44 http://ec.europa.eu/finance/consultations/2015/capital-markets-union/index_en.htm, last accessed 30 July 2015.

45 J Hill, “Next Steps to Build a Capital Markets Union”, speech at the Conference, Brussels, 8 June 2015 http://europa.eu/rapid/press-release_SPEECH-15-5137_en.htm, last accessed 30 July 2015.

46 Eg Y Mersch, “Capital Market Union – the ‘Why' and the ‘How'”, speech at the Joint EIB-IMF High Level Workshop, Brussels, 22 October 2014, http://www.bis.org/review/r141023g.htm, last accessed 30 July 2015.

47 See Pesendorfer, supra n 11.

48 All references to responses are taken from the EC's CMU public consultation website: https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en, last accessed 30 July 2015.

49 German Banking Industry Committee – Die Deutsche Kreditwirtschaft, answer to question 1.

50 Ibid.

51 Eg UK Sustainable Investment and Finance Association response, question 32.

52 Persaud set the tiny FTT in an impressive relationship to other transaction costs in finance to demonstrate the ridiculous opposition against this tax; A Persaud, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk (New York, Apress, 2015).

53 World Future Council, the German NGO mentioned as a CMU opponent, argued for a broad-based FTT. Several other responses, including French consultancy/law firm Proxinvest SAS, Expert Corporate Governance Service (ECGS), BFFA and DSW proposed that the FTT should be reviewed to meet the stated goal of targeting financial institutions instead of the “real economy”. ATHEXGroup, a Greek response from the market infrastructure area, recommended a tax design that would “not allow for tax arbitrage as this would undermine capital market funding options and would hamper the goals of the Capital Markets Union”.

54 Hill, supra n 45.

55 Response by Finansforbundet, Danish trade union, see also Nordic Financial Union, answers to question 32.

56 Response by Finance Watch, question 19.

57 Hill, “Refocusing”, supra n 13.

Additional information

Dieter Pesendorfer, School of Law, Queen's University Belfast.