Tackling climate goals and defence funding
The previous legislative term introduced key proposals for a fair, green, and digital transition. With most rules now in place, the focus must shift from policy design to implementation, with efforts directed towards financing this transition – and this is all taking place against a substantially altered geopolitical and macroeconomic backdrop, and in an environment where the impacts of climate change are increasingly visible.
This Commission is the last one able to implement the goal of reducing greenhouse gas emissions by at least 55% compared to 1990 levels by 2030 – if the EU wants to maintain this target, it will need to act now.
On the defence side, von der Leyen’s promise to appoint a dedicated defence commissioner was a key part of her re-election campaign, along with a pledge to publish a white paper on the future of European defence. Her first challenge will be finding the funding.
Leveraging private capital
There is a growing consensus that all of these major political projects from the EU will have a price tag. Government funds are still reeling after years of unprecedented public spending mitigating the impact of the “permacrisis”, and new EU rules now aim to rein in government spending. So, where will the money come from?
According to Enrico Letta’s report on the Future of the Single Market, the initial priority should be to mobilise private capital. EU citizens have 33 trillion euros in private savings. However, this wealth is not fully leveraged to meet the EU’s strategic needs. Most is held in currency and deposits – not generating a return on investment, and around a further €300 billion of European families’ savings are diverted annually to markets abroad, much of it into the US economy.
Introducing the savings and investments union
Letta’s report calls for creating a Savings and Investments Union, developed from the incomplete Capital Markets Union, to fully integrate financial services within the Single Market and attract additional resources from abroad.
Indeed, Ursula von der Leyen is reviving the decade-old « capital markets union » project. The idea is to boost private investment in the EU, both from businesses and citizens, to fund major political projects with less reliance on public financing. However, progress has been slow over the past 10 years.
Based on suggestions from Letta’s report, Ursula von der Leyen plans to refresh the capital markets union concept. The term « capital markets union » will be replaced by « European Savings and Investments Union » (ESIU). The ESIU aims to encompass banking and capital markets to better utilise private savings in Europe.
More than a rebranding?
Is the ESIU more than just a rebranding? According to the narrative behind the strategy, it certainly is. The ESIU aims to stop the massive loss of potential investments within the EU and strategically channel it to boost business in Europe. Additionally, von der Leyen’s push for a new European Competitiveness Fund to support cross-border projects suggests a more strategic and focused approach compared to previous CMU efforts.
The ESIU plans to simplify regulatory frameworks and make the EU more competitive. This involves developing the securitisation market, aligning capital market supervision, reassessing regulations to cut costs, and encouraging equity financing through improved tax systems. These steps reflect the European Commission’s approach to integrating financial services across the EU, but they will only be effective if they are implemented properly and focus on addressing the real issues that cause fragmentation.
The need for financial integration
The goal of this rebranding and its associated initiatives is to fully integrate financial services within the Single Market.
When the Single Market was created, finance was initially excluded as it was considered too strategic to extend beyond national borders, prioritising domestic control for strategic interests. However, the Commission now hopes to further integrate financial services to compete with American, Chinese, and Indian markets.
The lack of financial integration has significant economic consequences for Europe. The EU Single Market is lagging behind the US market. In 1993, the two economic areas were comparable in size, but from 1993 to 2022, GDP per capita in the US increased by almost 60%, while in Europe it increased by less than 30%. A context reflected also by the decline of European financial services firms on a global scale since the financial crisis of 2008, as reported by a recent study from OMFIF and LFF.
Saving vs investing
Unlocking the potential of European savings is crucial for the success of the new ESIU. Encouraging pension savings can provide stable, long-term funding for the economy, but the reality might be slightly different from the theory. In the US, 60% of households own stocks, compared to just 18% in France and similar numbers in Germany. The value of European stock markets as a percentage of GDP is half that of the US. Additionally, European venture capital is only 1/20th the size of the US venture capital market.
Looking ahead: unfinished business…
Despite the new policy strategies taking shape, the past continues to influence the present. The new European Commission will inherit a significant amount of unfinished business in financial services. During the 2019-24 term, the European Parliament and the Council agreed on or adopted over 50 ‘Level 1’ acts on financial services and related issues. However, over 20 financial services legislative proposals remain for the new Commission taking office in October.
Several of these texts are essential building blocks for the CMU, including:
- Proposal for a Regulation amending the Single Resolution Mechanism Regulation to establish a European Deposit Insurance Scheme
- Proposal for a Regulation on a framework for Financial Data Access (FIDA)
- Proposal for a Directive on payment services and electronic money services in the Internal Market (PSD3)
- Proposal for a Regulation on payment services in the internal market (PSR)
- Proposal for a Directive harmonising certain aspects of insolvency law
… and pending reviews
There are also quite a few reviews and consultations still pending, which could lead to new legislative proposals. Many of these are part of the CMU, such as:
- Investment firms prudential framework
- Macro-prudential policies for non-bank financial intermediation
- Review of the UCITS Eligible Assets Directive
- Review of implementation of the Sustainable Finance Disclosures Regulation
- Credit rating agencies
- Shortening of settlement cycle (T+1)
- Review of the Money Market Funds Regulation
- Review of the Directive on settlement finality in payment and securities settlement systems
- Review of the Directive on financial collateral arrangements
This unfinished legislative work from the previous term will clearly influence the new Commission’s legislative financial services agenda, potentially delaying new proposals to advance the capital markets union.
Completing the CMU and extending it into the ESIU benefits not just the financial services industry but the entire Single Market. This aligns with the EU’s mandate to address major funding needs for the energy transition and defence integration. While progress has been slow with the CMU, current climate urgency and geopolitical and economic pressures might drive more decisive action towards a prompt, efficient, and smart implementation of the ESIU. Wouldn’t this be an opportunity to (re)build an independent and reliable European economic leadership?