In the spirit of unity, let me start with a statement we can all agree on: the EU needs to grow its capital markets.
That statement begs at least two big questions. On these, there is less agreement. Firstly, how should we grow them? And secondly, why haven’t they grown more already? A lot of thought is going into addressing these questions through the lens of specific areas within EU capital market policy. This is incredibly valuable, because successful systems are not built solely by overarching ambitions, but through a multitude of small technical successes. Overcoming barriers on everything from clearing systems and sustainability disclosure to retail investment and insolvency regimes is naturally important to capital market development. Well-functioning capital markets require a sound and logical institutional architecture, good regulation and robust supervision.
But let me posit a more general, and possibly more controversial, barrier to the EU’s capital market development: capital markets like growth, and the EU doesn’t have enough of it.
Since 2008, the EU economy has grown at a pedestrian pace of just above one percent per year. That means it is about 15% bigger today than at the onset of the global financial crisis. For comparison, the US economy grew by about 28% during the same period. Out of the world’s twenty most valuable technology companies, only two are listed in the EU. Fifteen are in the US and the remaining three are in Asia. This relative lack of economic growth is not exactly an engine for growing capital markets, and we should recognise that.
The direction of causality admittedly is not clear cut here. The reason the US, for example, has grown more than Europe may well be in part because of its much stronger capital markets. But while it is surely true that good ideas go where there is money to finance them, money also follows good ideas and growth, to paraphrase Joan Robinson. The growth of capital markets and the real economy therefore go hand in hand.
The case for larger and more developed capital markets, then, is clear. Financialisation is not an end in itself. Rather, capital markets are important because they are well-suited to financing long-term, uncertain ventures, and mobilising such funds is more important than ever. The EU’s ambition of less resource-intensive and more sustainable growth, for example, will necessarily require enormous investments in nascent technologies. The European Commission’s own estimate is that annual investment needs to increase by €645 billion annually over the next decade compared to the previous one in order to realise the green and digital transitions. That, for reference, is an annual increase larger than the total Swedish GDP. And we should not forget that the reconstruction of Ukraine will add to that figure, requiring massive investment and mobilisation of capital.
Clearly, amounts of this magnitude necessitate the mobilisation of private capital, which is most effectively done through capital markets. We know this from previous large-scale transitions, like the expansion of railway and telecommunication networks. EU capital markets are not currently offering this mobilisation to the extent that the transition, and the size of its economy, demand. This is visible across a range of capital market indicators: for initial public offerings, secondary public offerings, stock market capitalisation and corporate bond issuance, the EU’s share in the global total is smaller than its GDP share. Policymaking should proceed with this in mind.
The second thing we should keep in mind is that capital markets are global. It is this global flow of capital which has enabled resources to be put to productive use on a historically unprecedented scale, to the benefit of people all over the world. Simply, the global economy depends on the effective functioning of capital markets. This has real world impacts: we see it in action in the development of clean technology and new medicines, for example. It is imperative to our continued prosperity that we maintain this global functioning.
Indeed, global coherence is an important aspect to consider when designing regional policies. Currently, around ten percent of the world’s market capitalisation is on EU exchanges. It is good to have an ambitious agenda for regulation of local markets, but when 90% of global public equity sits outside of the EU, it is neither realistic nor desirable for EU regulation to be unaligned with the rest of the world. Being a leader is a fine ambition, but a leader should ideally also have followers. A fragmentation of global capital market regulation would result in inefficiencies and cost increases for companies seeking to raise capital, not just for firms operating in multiple jurisdictions, but also for small and medium-sized companies which will have less financing available to invest and grow. Capital markets must work for all – governments, citizens, and businesses of all sizes.
Fragmentation also runs the risk of lowering diversification on the EU investor side, exacerbating the impact of local downturns on the stability of the financial system and the economy. Fragmentation based on different rules and standards would also increase opacity in markets at a time when global challenges like climate change more than ever require transparency and accurate pricing, including of externalities. Ultimately, global problems cannot be solved locally.
Instead, policymaking must proceed based on a platform of global consensus to the extent possible. A well-functioning world economy is one guided by common principles and shared values. That includes capital markets. At the OECD, that is our guiding principle, and the basis from which we proceed to develop our international standards. The G20/OECD Principles of Corporate Governance, which is one of the FSB’s key standards for sound financial systems, and the G20/OECD High-Level Principles on Financial Consumer Protection are two important examples of international standards including not just OECD countries, but also heavyweight emerging markets like China and India. Promoting international standards does not mean relying on a one-size-fits-all approach, but rather ensuring that there is a baseline on which there is broad agreement, which can then be adjusted according to national circumstances.
These two points – capital seeks growth opportunities, and it moves globally – should not be forgotten. They should feed into and guide more technical discussions in policy debates in Brussels and individual member states.
Still, there is reason for optimism. The EU has steered clear of a systemic financial crisis even in the face of significant stress tests like the pandemic, the ongoing war in Ukraine and the recent banking turmoil. It has set out an ambitious and sensible strategy for its capital market development, and while it urgently needs to be accelerated, progress is being made on implementing it. We should not wait for the next financial crisis to advance the CMU agenda. At the OECD, we are contributing to that ambition through our capital market reviews, supporting the EU and its member states on capital market development.
In the end, perhaps the greatest reason for optimism is the amount of brainpower that is going into boosting EU capital markets. We are, in other words, in capable hands. Let us just not lose sight of the bigger picture.
Author’s note: This article is based on a speech given at the Eurofi High Level Seminar in Stockholm on 26 April 2023.