The Capital Markets Union (CMU) is an integral part of the European Commission’s Investment Plan for Europe to boost jobs and growth. To put it simply, the CMU aims to strengthen the link between savings, investment and growth by promoting more diversified funding channels to the real economy, thereby reducing reliance on bank lending.
No single action will deliver a CMU. Instead a series of measures are needed to increase the share of European savings channeled through the capital markets. These measures tend to be discussed by policy makers and industry representatives, without much buy-in from citizens. This is not surprising as the issues are very technical, in particular those concerning cross-border investment, such as insolvency, tax and securities law, or relating to the regulatory capital charges and the quantitative and qualitative limits constraining the investment of institutional investors.
These matters need to be tackled if we want to successfully rebalance the European financial system towards a more “market-based system”. However, also placing a stronger emphasis on the role of citizens in a well-functioning financial system will ensure CMU delivers with impact. Europe’s excessive dependence on bank financing is for a large part the result of “cultural” barriers which discourage many individuals from investing in capital markets. The lack of an “equity culture” and trust in financial markets, a low level of financial expertise, and a high degree of risk aversion are reasons why households hold on average 40% of their financial wealth in bank accounts in the euro area.
The CMU project requires a kind of “cultural” change to better mobilize savings through capital markets and address households’ concerns. Striving towards the following three goals could help such a shift to take place:
- Promoting financial education
Policy measures aimed at improving financial education will be critical to households’ involvement in improving their future financial wellbeing. In particular, the idea that uncertainty about real returns is reduced as the holding period increases needs to be promoted. This is particularly relevant for pension asset accumulation, as the investment period is long-term in nature.
- Improving markets for retail investment products
A lot of progress has been made in recent years to improve rules governing product disclosure and investment advice. Still, more can be done to facilitate cross-border distribution of investment funds in the EU and allow more choice and better returns for investors. Greater emphasis on technological developments would also help online access of retail investors to investment products and further advisory services.
- Creating a Pan-European Personal Pension Product
Last but not least, support of the European Commission’s proposal to create a pan-European Personal Pension Product (PEPP) by the European Parliament and Member States will be crucial. Capital markets instruments are viewed by many households as too risky. Encouraging individuals to start saving for retirement at a young age, and emphasizing that the risk-return performance of equity and bonds depends on the investment horizon, will help address this misconception. The ambition of creating a simple, safe, transparent, trustworthy and cost-effective personal pension product would also help strengthen households’ confidence in the potential of market instruments.
The creation of a PEPP will also improve the EU single market for personal pensions by encouraging competition between all market players, by enabling efficiency gains through economies of scale and lower costs, and by offering a wider choice of products to households. In doing so, the PEPP will benefit EU consumers and therefore increase their willingness to re-allocate their savings towards more market-based instruments.
The CMU is not just a technical project for experts, policymakers and industry professionals. Rebalancing the European financial system towards a more “market-based system” will only be done by placing European citizens, who hold the key to savings in the economy, at the heart of the CMU project.