The document focuses on identifying the main obstacles to the integration of capital markets in Europe and recommends policy initiatives to address them.
It begins by traversing the landscape and quantifying some of the costs of fragmentation. Below, based on a survey conducted among market professionals and empirical work, the main obstacles to integration are identified.
Based on these findings, the theory and practice of capital market supervision are discussed and concluded by urging the adoption of a set of measures focused on transparency, regulation and insolvency procedures.
The International Monetary Fund study presents relevant conclusions, among which the following stand out:
The paper has tried to systematically expose the benefits of further integration of the capital market in Europe, identifying the barriers and outlining a practical way forward. Urges the adoption of a series of specific policy measures led by the EU institutions, with complementary actions at the level of the Member States, that directly address fundamental issues such as improving information and prudential supervision of systemic actors , strengthening investor protection and improving insolvency procedures.
Achieving the Capital Markets Union (CMU) will require political will to overcome resistance from vested interests. One source of resistance will be incumbents who fear losing revenue, potentially including local bank lobbies; local banks will need to be convinced that the solution to structurally weak profitability lies in cautiously venturing into capital markets. Another could be in the hands of national authorities, who could reduce domestic reluctance; In this case, the challenge will be to argue in favor of the CMU as a way to encourage a flow of capital in both directions and for the benefit of all.
The vision of a truly integrated European financial union requires a well-functioning banking union and a dynamic CMU, in healthy competition. The CMU should complement, not displace, the bank, allowing the whole to be more than the sum of the parts. To reap the economic benefits of both market-based and relationship-based financing, proportionate public oversight will be necessary. In capital markets, the regulatory approach should focus on facilitating effective market discipline, with prudential supervision of systemic participants that is indiscriminate.
Ultimately, the path to financial integration must be accompanied by fiscal responsibility and structural reforms. Efforts to complete the banking union and the CMU should be part of a broader push to close productivity gaps and advance per capita income convergence across Europe, with countries seeking fiscal adjustment and market reform labor and products, to improve its attractiveness as an investment destination. The CMU offers the promise of facilitating capital flows, but it will be the trade-off between risk and reward that will determine its direction.