Simply addressing specific barriers to market integration may not be sufficient to establish a genuine capital markets union (CMU), wrote Fabio Panetta, member of the European Central Bank’s Executive Board, with a call to “keep our eyes on the broader picture” and warning on “critical blind spots”.
From the blog:
“The first is the lack of a permanent European safe asset. Historically, mature capital markets have been built around a public safe asset. In the US, for example, capital markets developed alongside the issuance of federal bonds.
“A risk-free benchmark is necessary for critical financial activities. It would enable better pricing of risky financial products, such as corporate bonds or derivatives, encouraging the development of such products. It would provide a common form of collateral that would promote centralized clearing activity and cross-border collateralized trading in interbank markets. It would also help diversify bank and non-bank exposure. And it would support the euro’s international role, helping to attract foreign investors.
“Establishing such a permanent European safe asset would be a game changer, but it hinges on Europe having a standing fiscal capacity with a borrowing function. Without that, building a deep and competitive CMU will prove much more difficult.
“The second blind spot is the lack of a complete banking union, which restricts European banks to operating in one or just a few national markets.
“Banks play a crucial role in the functioning of all major capital markets. They operate — and often have a leading role — in crucial segments like asset management, bond underwriting and trading, initial public offerings and financial advice. They are active traders in securities markets and often provide market-making services. Thus, it is difficult to envisage a genuine CMU without the key players being able to operate throughout the euro area.
“The global landscape is evolving rapidly, and Europe must keep pace, if not lead, that change. To be successful, it needs a genuine — and complete — CMU,” Panetta said.