European Capital Market Union and Financial Integration

The Capital Markets Union (CMU) is a significant policy initiative by the European Union to strengthen and integrate capital markets. The idea for a single capital market began with the Treaty of Rome. Then, the Maastricht Treaty was established, leading to capital market integration by allowing the free movement of capital. However, despite the two treaties, the European Union failed to achieve a genuinely single market.

In 2015, the former EU Commissioner, Juncker, first published his plan for a Capital Unions Market. The CMU, if well-functioning, aims to increase investment in the future by improving access to funding, giving households more savings options, increasing financial stability, and deepen economic integration in the EU.

Financial integration as access to financial services

For the EU, financial integration can be seen as equal access to financing and financial services. In this direction, CMU should be a key factor for SMEs. Indeed, it aims to reduce financial fragmentation and increase capital flow towards Europe and make links between local capital markets and capital across the EU. Small and medium companies’ access to capital is an essential factor for economic growth and the labor market in the Eurozone.

SMEs depend on banks and loans in a long-term framework in the Eurozone. Indeed, the EU market is loan-based as companies mainly rely on loans to support their activity compared to other financing sources. However, loans can be too costly for new innovative companies, startups, or companies with inconstant revenue. Therefore, an option for such companies should be gathering funds from the equity market.

The Euro Area equity market to GDP is not consistent like in other countries such as the US. To help increase investments toward the capital market, the EU aims to provide investors access to company information, simplify listing rules, and incentivize investment funds and other institutional investors to invest in such companies.

Market Capitalization as percentage of GDP in the Euro Area. Source:
Market Capitalization as percentage of GDP in the U.S. Source:

Moreover, the Capital Market Union wants to stimulate retail investors’ investments to increase capital and general liquidity. This because Europe has high individual saving rates and low individual participation in the equity market. People’s participation in the stock market would allow them to build or protect their wealth and meet their needs related to health, education, and retirement and enhance an alternative source to SMEs’ bank loans.

Financial integration as unique set of laws

Integration can also be seen as the presence of a harmonic and unique set of rules and laws. Indeed, differences in regulatory policies and legislations lead to barriers to capital movements and reduce market efficiency; thus, a single set of rules must be defined and applied in the EU. For example, such barriers can be represented by the divergences in insolvency rules, since deciding where and how to invest requires the knowledge of expected return and legal rights in case risk scenarios materialize and taxation.

Market participants would find it easier to invest in firms located in different Member States if core elements of insolvency regimes, such as the definition of insolvency triggers, avoidance actions, were harmonized. Nevertheless, insolvency legislation is deeply engrained in legal traditions and national rules, so it is hard to see how a substantial harmonization degree could be achieved in the next future. However, so far, the EU has gone through several capital market regulations that have helped promote CMU in infrastructure, investments, company law, securities, banking, and other products available on the market.

The European System of Central Banks (ESCB) and its Statistics Committee (STC) aims to increase data collection efficiency from banks. Therefore, they started the IReF project, which stands for Euro system Integrated Reporting Framework and aims to integrate the Euro system’s statistical requirements for banks into a single standardized and harmonized reporting framework.

Financial integration as equality among partecipants

This topic brings us to the last primary definition of integration: integration as equality among agents. It means that measures that promote access to relevant data and information for markets, investors, and households can thus contribute to an improved and functioning capital market; the IReF project aims to bring equality among investors through its purpose of transparency.

Moreover, we define financial literacy as the knowledge to make informed financial decisions at the individual level. It is an individual skill related to individuals’ capability to deal with financial concepts, take financial decisions, and balance these risks and returns. Central banks and statistical agencies have invested in improving our understanding of financial markets. They aim to ease access to relevant data available for private market participants and researchers.

Finally, consumer protection is necessary for consumers and firms to benefit from integrated financial markets or investment products. Hence, developing or enhancing national strategies to improve financial education can further advance CMU and financial integration.

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