Will a New Union Enhance European Cross Border Distribution? 

Nearly a decade in the Capital Markets Union and little progress has been made so far to enhance European Cross Border Distribution of financial goods and services. Let alone foster greater participation of European households to capital markets. Or that is what it seems.  

The perceived shallowness of European capital markets has pervasive implications especially for European companies says Ursula von der Leyen in the Political Guidelines for the Next European Commission (2024-2029). Not only the most innovative start-ups, but nowadays also more established enterprises are forced to look at the American and Asian markets to finance their growth.  

This can no longer be the case and European capital markets need now to step up.  

American Idol 

So far, the cure for the lacklustre performance of European capital markets has been to introduce legislative measures to align the functioning of European capital markets to the ones in the US. Starting with an attempt to reduce the hurdles to European Cross Border Distribution of financial goods and services. That was part of the first Capital Markets Union, a plan of the European Commission to revive European capital markets. More emphasis on reducing costs and boosting value of investment products came in 2020, with the second iteration of the  initiative. Both versions of the Capital Markets Union contained some sort of parallel or comparison between Europe and the US, where the USA seemed to hold the golden standard for efficient capital markets. 

Then with Trump 2.0 there is a twist in the plot. No more idolising the state of the US capital markets. Europe must forge its own path, leveraging on its strengths. A new union – Savings and Investments Union – is currently on the cards. This new union comes with the ambition to stimulate private investments in projects of European interest, ranging from green to digital economy, in a bid to ensure that households in Europe can finally benefit from a diversified and high-yielding savings ecosystem. 

Falling Short of Expectations 

Despite significant efforts in the recent past to create an efficient single market for capital in Europe, data shows that results are still falling short of expectations. According to Eurostat, the statistical office of the European Union, in Q2 2023 European households saved 14.79% of their disposable income, with €11.63 trillion of wealth held in currency and deposits. Whilst the amount of savings held is indeed significant, European households continue to allocate their wealth to low-yielding bank deposits as it has been tradition for quite some time now in continental Europe.   

The downsides of the lack of effective participation to local capital markets are twofold. On the one hand, European households are missing out on potential wealth creation opportunities. On the other, the European priorities of green and digital transition will not receive the support required. The inefficiencies in the European cross border distribution of financial goods and services exacerbate this problem, still hindered by various obstacles, including regulatory complexities, differing tax regimes, and inconsistent supervisory practices across member states. The lack of sufficient market integration means that many investment opportunities are not accessible to all European citizens, especially when it comes to smaller or innovative companies.  

These barriers not only reduce the attractiveness of European capital markets but limit the potential for capital to flow freely across borders. And where goods of financial nature do not move as freely as they could throughout the single market, notwithstanding the work done so far under the Capital Markets Union, European households continue to have little propensity to look for investment opportunities across their national borders.  

The Status Quo is Far from Ideal  

The Savings and Investments Union is one more strategic move for Europe to leverage the substantial private savings of its citizens. Its aim and overarching objective are to better connect savers with investment opportunities. Especially in innovative sectors like green and digital technologies, which remain priorities in the economic agenda of European authorities for the years to come.  

One of the core goals of the Savings and Investments Union remains though to make capital markets more accessible to European households. That includes incentivizing exposure of retail investors and households across Europe to investment products. The Savings and Investments Union will be based on a set of essential actions and measures. Some new and some not as much.  

A more effective mobilisation of savings under the Savings and Investments Union will be achieved via measures at product level first. This is the innovative part. More namely, with the introduction of simpler low-cost investment options that will allow individuals to invest their savings in a variety of assets.  

At the same time, one of the pillars of the Savings and Investments Union will continue to be identifying and removing existing barriers to European cross border distribution, whether they be supervisory, tax related or other. This was in essence one of the core pillars of the Capital Markets Union already. This time, more integrated capital market will come as a result of the creation of a single set of rules for capital markets as well as the enhancement of supervisory arrangements amongst the various national competent authorities in Europe. A single rulebook for capital markets, with uniform regulations that can be applied consistently across Europe, will hopefully assist with reduction of compliance costs and improvement of the overall efficiency of capital markets. It will also contribute to the creation of a level playing field for investment products, removing some of the complexities associated with European cross-border distribution in Europe.  

Finally, strengthening supervisory arrangements amongst national competent authorities will also contribute to greater market stability and ensure that financial markets remain well-regulated and functioning in an orderly manner. Certain markets of sectors within markets might also see supervision centralised at European level.  

Conclusion 

Discussions are still at embryonal stage, yet the new Savings and Investments Union seems to have discarded one of the pillars of the second iteration of the Capital Markets Union – financial literacy. Hence the significant divergence from the US model, where financial literacy is more widespread and much more evenly across the various social classes thus allowing for greater participation to capital markets compared to Europe.  

Details are scarce at this stage, yet the idea of a new category of simpler low-cost investment products is seen as a substitute to bank deposit, which are still largely the flavour of continental European households.