Camine Di Noah
Carmine Di Noia
Director, Financial and Corporate Affairs Division, Organisation for Economic Co-operation and Development (OECD).
In the spirit of solidarity, let me start by saying something that we can all agree on: the EU needs to develop its capital markets.
This sentence raises at least two big questions. On both issues, there is little agreement. First of all, how should we develop the capital market? Second, why has the capital market not been developed to a greater extent? We should start with the specific areas of the EU's capital market policy and think deeply about these issues. This is very valuable, because successful systems are not built solely on grand ambitions, but through numerous small technological successes. Overcoming obstacles, from clearing systems and sustainability disclosures to retail investment and insolvency regimes, is naturally important for the development of capital markets. A well-functioning capital market requires a sound and rational institutional framework, good supervision and strong supervision.
Since 2008, the EU economy has grown at just over 1% per year. This means that the EU's economy is now about 15% larger than it was at the time of the global financial crisis. By comparison, the U.S. economy grew by about 28% over the same period. Of the 20 most valuable tech companies in the world, only 2 are listed in the EU, 15 in the US, and the remaining 3 in Asia. This relative lack of economic growth is not exactly the engine of capital market development, and we should recognize this.
Admittedly, the direction of causality is not clear. For example, the reason why the United States has developed faster than Europe may be due in part to the strength of its capital markets. But, to paraphrase Joan Robinson, while good ideas do go where there is money, money also follows good ideas and economic growth. It can be seen that the development of the capital market and the real economy are complementary to each other.
Therefore, the case for a larger, more developed capital market is clear. Financialization is not an end in itself. On the contrary, capital markets are important because they are well-suited to fund long-term, uncertain businesses, and mobilizing these funds is more important than ever. For example, the European Union's desire for less resource-intensive and more sustainable growth will inevitably require significant investment in emerging technologies. The European Commission's own estimate is that annual investment over the next decade will need to increase by €645 billion per year compared to the previous decade to achieve green and digital transformation. For reference, this annual growth rate is more than Sweden's GDP combined. We should not forget that the reconstruction of Ukraine, which will increase this amount, will require significant investments and financial mobilization.
Clearly, such a large amount of capital requires the mobilization of private capital, and the most effective way to mobilize private capital is through capital markets. We know this from previous large-scale transformations, such as the expansion of rail and telecommunications networks. The EU's capital markets are not currently able to provide the kind of mobilization needed for the transition and the scale of its economy. This can be seen in a range of capital market indicators: the EU's share of global aggregates is lower than its share of GDP in terms of initial public offerings, secondary public offerings, stock market capitalisation and corporate bond issuance. This should be taken into account when formulating policies.
The second thing we should keep in mind is that capital markets are global. It is this global capital flow that allows resources to be used for production on a scale unprecedented in history, for the benefit of people around the world. In short, the global economy depends on the efficient functioning of capital markets. This has real-world implications, which we have seen, for example, in clean technology and new drug development. For our continued prosperity, we must maintain this global operation.
In fact, global coherence is an important aspect to consider when formulating regional policies. Currently, about 10% of the world's market capitalization is listed on EU exchanges. While it's good to have an ambitious local market regulation agenda, it's neither realistic nor desirable for EU regulation to be disconnected from the rest of the world when 90% of the world's public equity is outside the EU. A leader's ambition is commendable, but the ideal leader should also have followers. Fragmentation of global capital markets regulation will lead to inefficiencies and increased financing costs for businesses, which will be detrimental not only to businesses operating in multiple jurisdictions, but also to small and medium-sized enterprises (SMEs), which will have less capital to invest and grow. Capital markets must work for everyone, including governments, citizens, and businesses of all sizes.
Fragmentation could also reduce diversification on the part of EU investors and exacerbate the impact of local recessions on the financial system and economic stability. At a time when global challenges such as climate change require transparency and accurate pricing, including externalities, more than ever, fragmentation based on different rules and standards will also increase market opacity. At the end of the day, global problems cannot be solved locally.
Original link:
https://cepr.org/voxeu/blogs-and-reviews/giant-missing-piece-eus-capital-market-puzzle
(Chang Changsheng/excerpt)
The above views and remarks do not represent the position of this platform.
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