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“The European Commission is bent on developing European capital markets to facilitate company finance. But there is little reason to believe that this can be achieved through public policy at EU level. Rather, a history of openness to trade and capital and a liberal policy environment at national level seem to be the key ingredients for well-functioning capital markets, as exemplified by the Netherlands, Luxembourg and the UK.
“The liberalising measures contained in the Commission’s Action Plan are certainly welcome. In particular, a review of all the different regulations adopted since the financial crisis is long overdue. There is reason to believe that the new Basel rules, and EU measures such as Solvency II and the AIFMD, are making it more difficult for EU lenders and investors to provide capital for business, without making the financial system more stable. Furthermore, the promotion of private pension systems across the continent is an economic and demographic imperative.
“But many of the other proposals are misguided. There may be good reason to reduce capital charges on corporate debt, but such a move should not be guided by political considerations such as the promotion of infrastructure investment. Similarly, the harmonisation of insolvency and the tax treatment of debt would involve substantial transition costs from long-standing national legal systems, without making cross-border investment noticeably easier or more secure.
“The Capital Markets Union is founded on the belief that, after half a century of open markets in Europe, the free movement of capital still has not been fully achieved. Yet, there is little reason to believe this is the case: European and international financial institutions do operate across Member States, and indeed many EU insurance companies, pension funds and other asset managers hold large shares of their portfolios in foreign equities. Greater standardisation and centralisation at EU level are unlikely to make European capital more mobile.”
Notes to editors:
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To read an EPICENTER briefing on the subject, Company finance in the EU, and the Capital Markets Union, click here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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