The completion of the European single market came a step closer last month as the European Commission published its action plan for delivering a Capital Markets Union (CMU) by 2019.
Broadly speaking, the aim of the CMU is to improve the financing of the European economy by further developing and integrating capital markets.
According to the Commission President, Jean-Claude Juncker, it will “cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding.”
Currently big banks provide 70% of European businesses’ external financing through business lending schemes. The shortfall of this situation was felt acutely during the global financial crisis and the hangover persists with SMEs across Europe still experiencing limited access to funding as banks continue to retrench their positions.
So why is the CMU important and how will its introduction help SMEs?
The CMU is important for SMEs because it will allow businesses to raise the funds they need from a diverse range of sources “irrespective of their location”. At the moment, businesses mostly raise funds in their own domestic market due to the barriers that exist between the 28 EU member states’ capital markets.
There are significant differences in financing conditions between EU member states which makes for a testing environment for small firms who may want to secure funding from abroad to support their expansion and export ambitions.
Similarly, some markets around Europe have more (or less) developed financial sectors. The current system does not provide small countries with the opportunity to benefit from larger, more fruitful counterparts. The CMU would therefore help to level the playing field – advancing the quality of all member states’ lending capacity as a collective rather than individually.
In the current market, shareholders and buyers of corporate debt do not feel confident about going beyond their national borders when making investment choices. This means that a huge amount of capital is trapped within national borders, which unnecessarily restricts the funding available to small firms. By unlocking the flows of capital, small firms will be able to fulfil their desired growth plans by accessing capital in a shared single market.
For further information on the CMU action plan, visit: http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-action-plan_en.pdf.