The International Capital Market Association (ICMA) recently released a summary of the recommendations in the Draghi report on Capital Markets Union (CMU) and financial services.
The objective of the 400-page report released by former European Central Bank (ECB) president Mario Draghi is to propose a growth strategy for Europe. To meet this objective, the report estimates that a minimum annual additional investment of €750 to €800 billion ($884bn) is needed.
The report argues that a key question that arises is how the EU should finance the substantial investment needs that transforming the economy will entail. Two key conclusions can be drawn for the EU.
First, while Europe must advance with its CMU, the private sector will not be able to bear the lion’s share of financing investment without public sector support. Second, the more willing the EU is to reform itself to generate an increase in productivity, the more fiscal space will increase, and the easier it will be for the public sector to provide this support.
The report states that a key reason for less efficient financial intermediation in Europe is that capital markets remain fragmented and flows of savings into capital markets are lower. Europe is faced with an unprecedented need to raise investment at both massive scale and rapid speed.
In a media briefing, the International Swaps and Derivatives Association (ISDA) highlighted some key points from the report:
- Collateral: Draghi suggests the issuance of a common safe asset, which would – among other benefits – “provide a type of safe collateral that can be used in every country and in all market segments, in the activities of central counterparties and in interbank liquidity exchanges, including on a cross-border basis”.
The EC president will aim to form a cabinet, with related mission letters expected to cover certain aspects of the report as part of future EU policies. - Sustainable finance: The report considers the EU’s sustainability reporting and due diligence framework as “a major source of regulatory burden”.
- EU supervision: The report discusses the need to complete the EU’s Capital Markets Union and the reduce its dependence on bank financing. In this context, the report also suggest the European Securities and Markets Authority should “transition from a body that coordinates national regulators into the single common regulator for all EU security markets”.
- Basel framework: The report calls for the EU to “assess whether current prudential regulation, also in light of the possible upcoming implementation of Basel III, is adequate to have a strong and international competitive banking system in the EU”.