The euro-debt crisis revealed a series of weaknesses in the currency union. They include a lack of coherent economic policy, a tendency to focus on national interests in financial markets and minimal adhesion to rules governing the euro.
To make matters worse, there is scarcely any political momentum to develop new euro-zone rules that would require altering European treaties.
Against this background, deepening the internal market by creating a capital markets union seems a valid and more easily attainable goal. But the capital markets union, an E.U. initiative designed to ease the flow of investment cash around the bloc, should not be seen as a substitute for a fiscal union, or further political integration in the 19-nation euro zone.
A cultural change toward increased financing through capital markets requires time, explanation and rethinking by both companies and investors.
In order for a capital markets union to succeed, it has to meet certain requirements. According to the European Commission, the E.U.’s executive arm, an improved response to the financial needs of small and mid-sized companies should be the top goal.
The main focus of the initiative is not supporting financial markets and their institutions, but boosting the real economy. Europe will only be able to overcome its weak growth through healthy small and mid-sized companies that are competitive and well financed. And financing through banks or capital markets are really two sides of the same coin.
A highly regulated banking sector should not have to compete with capital transactions that are subject to little regulation.
The optimal financial structure for small and mid-sized companies should grow in the market itself, within legal limits that guarantee a level playing field. Neither regulations nor governmental agencies should have an indirect influence on companies’ mix of financing.
One-sided advantages for financing on capital markets would be a mistake. Instead, there must similar risks for financing on capital markets or through banks, with both subject to the same regulations. A highly regulated banking sector should not have to compete with capital transactions that are subject to little regulation.
Regulatory intervention distorts competition, leads to faulty allocation of capital and can cause systemic risks, as was shown by the 2008 financial crisis. At that time, risky securitizations were backed with little or no equity, then accumulated too rapidly before failing one after another.
The recent history of credits to small and mid-sized companies, with their numerous insolvencies, shows it is crucial to improve the quality of financial products related to these companies, if the goal is winning over institutional investors or even broad segments of private investors.
On the side of lenders, expectations should not be too high with regards to advantages for companies – transparency over company data not made public up to now, as well as costs incurred through external ratings and stock-exchange fees, are quite relevant from the perspective of small and mid-sized companies.
If the estimate is that less than 5 percent of small and mid-sized companies in Europe could be capable of entering capital markets in the future – even under possibly eased requirements in a capital markets union – this would not constitute widespread support of such companies.
Whoever seeks innovation, growth and employment by means of promoting small and mid-sized companies, must also give thought to the other 95 percent. In particular, they must lower bureaucratic expenses, including those in bank financing.
German banks that provide small and mid-sized companies with financing are frequently anchored to particular regions, as is the case with Volksbanken and Raiffeisenbanken. These cooperative banks and credit unions in Germany are efficient and competitive.
They have always supplied their small and mid-sized business customers with sufficient and low-cost financing. In the future, financing on the capital markets should not be a substitute, but rather a supplement, for what should continue to be financing mainly through banks.
In a fundamental review of the regulatory framework, the focus should be on complementing a capital markets union with an initiative for small and mid-sized companies that makes it easier for them to receive loans. The requirements for financing companies should be subject to a general examination in Brussels, with the goal of reducing bureaucratic costs.
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