Towards the Right Policy Mix for a Thriving European Capital Market
On top of the vulnerabilities stemming from the incompleteness of the economic and monetary union, the financial and sovereign debt crises showed not only that the ‘intensity’ but also the ‘quality’ of the financial integration process matters. With the banking union and the capital markets union, one would hope for more ‘sustainable’ cross-border financial flows that could strengthen the virtuous circle of financial integration, financial stability and economic growth. For this to actually materialise, the remaining building blocks need to be put in place, national barriers to be knocked down while other policies (monetary, fiscal and structural) to become increasingly effective. At present, capital markets are at different stages of development across EU member states, and matching the supply and demand of capital on a cross-border basis remains problematic. While the banking sector is expected to remain the dominant source of finance, well-functioning, deeper and highly integrated European capital markets could provide alternative funding opportunities for companies and better choices for retail and institutional investors. Advancing with CMU is even more important in the current economic and political environment. Overall, bolder actions are needed in the coming years, and the mid-term review of the CMU Action Plan should not be relegated to becoming a mere tick-box exercise.