A shifting security landscape
Europe continues to adapt to a changing security environment shaped by Russian aggression.The invasion of Ukraine, uncertainty around future US support for NATO, and recent drone incursions have heightened long-standing concerns. In response, the EU has seen a significant increase in defence and infrastructure spending - Germany going so far as to amend its constitution to increase investment in defence, infrastructure, and the green transition. In a similar vein, Finland has joined NATO, and plans are underway to build an EU “drone wall” on the Eastern front.
In order to reach new defence spending commitments agreed by NATO members, the Centre for Economic Policy Research estimates that €320 billion in additional funding will be required per year.
The EU also faces an enormous challenge in raising enough investment to meet its green transition goals. The European Commission estimates that between 2011 and 2020 an average of €764 billion was invested in the EU each year to reduce emissions. In order to reach its 2030 target, the EU needs to raise investment in energy supply, energy demand and the transport sector, by a further €477 billion each year, totalling €1.2 trillion in annual investment.
Investment from the private sector is fundamental to respond to the challenges of the Russian threat and the green transition. The European Central Bank has emphasized that while bank lending will remain essential, a more integrated and dynamic capital market will be necessary to fund these ambitions. Enter the Capital Markets Union (CMU).
Officially launched in 2015, the main goal of the CMU was to create a single market for capital across the EU by the end of 2029. As you have correctly surmised, this has not happened. A key part of the CMU plan is centralised market supervision, the idea is to give the European Securities and Markets Authority (ESMA) direct supervision of more entities, modelled after the US Securities and Exchange Commission which both issues regulation and enforces it. Strong opposition from several member states, including Luxembourg, Germany, and Ireland, have previously held back previous efforts to integrate the EU's capital markets.
A more integrated Capital Markets Union would likely bring significant change for investment compliance teams across Europe and beyond. With a centralised regulatory environment under ESMA, teams would need to adapt to harmonised rules and reporting standard across member states, altering the scope and complexity of necessary disclosures and obligations.
Now, momentum is building once more. Germany, in its powerful position as the EU’s largest economy, has finally come around to the idea, and on 16 October has agreed to intensify its collaboration with France to advance the Capital Markets Union. This would include handing over much more regulatory power from the German regulator BaFin to ESMA, based in France.
Days later, on 22 October, European Central Bank President Christine Lagarde backed calls, from Germany again no less, for a single European stock exchange to support European listings and economic growth.
“If we are serious about moving forward, we must complete the banking union and we must apply the same logic - and faster - to capital markets: a single rule-book, a single supervisor, and a consolidation of exchanges."
Europe, and particularly Germany, is waking up from a somnolent complacency; a unified capital market is one of the many reforms available to the EU to strengthen its hand in the dark years it faces today, and to come. If two emergent existential threats can’t make this happen, nothing will.