How To make Capital Markets Union work

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David Harrison, Paul Woolley

Europe has a high rate of savings and using those savings to increase productive investment is the right approach.

However, Capital Markets Union (CMU) will not do this simply by removing barriers to competition in the European single market. The reason is that nearly all financial markets activity in the world today is carried out by professional intermediaries like asset managers and banks (agents), on behalf of actual end savers (principals).

Their interests are not identical. Competition between intermediaries can either be on the basis of expected cash flow (the stream of income from holding a financial asset), or on the basis of expected changes in the market price of assets. Intermediaries have incentives causing them to favour the latter approach, but the more widely it is adopted in the market the greater the instability of asset prices and the fewer the savings put to productive investment.

The solution is to make it a condition of cross-border access to the European capital market that a specified minimum proportion of assets of each portfolio under professional management is invested for savers solely on the basis of expected cash flow. This method of competition should be promoted by an audited publication of the results.

David Harrison is a competition lawyer and author of several books on legal and financial issues, including ‘Competition Law and Financial Services’ (Routledge, London and New York, 2014). Dr Paul Woolley is an economist and Senior Fellow at the London School of Economics, founder of its Paul Woolley Centre for the Study of Capital Market Dysfunctionality, and a director of Ricardo Research.