Buyer Beware: The EU Plots US-Style Capital Markets
By Staff News & Analysis - November 14, 2014

EU finance chief to announce capital market plan in 2015 … The EU's new financial services commissioner will set out his plans for a pan-European capital market by the middle of next year, aiming to reduce companies' reliance on banks and help revive the bloc's fragile economy. Jonathan Hill said on Thursday (7 November) he was seeking to create an integrated market for raising money through bonds, shares and other financial instruments over the next five years and would develop a plan by next summer following a consultation of banks, lawmakers and non-governmental organisations (NGOs). –

Dominant Social Theme: A further consolidation emerging, unplanned, from a crisis that none could have foreseen.

Free-Market Analysis: The continuing merger of Europe's nation-states grinds along, as we read in this report, excerpted above.

It may be a non-starter and thus further evidence of EU dysfunction. But it will be pursued nonetheless because it promises further centralization of power, authority and most importantly, money.

We're on record explaining this evolution numerous times. Those who set up the euro expected a failure of some sort that would drive the union toward further consolidation.

One needs to be cognizant of this larger history to see how the recent announcement regarding a "single market for capital" fits into a predictable pattern of enlargement that we might call "directed history."

It's not being portrayed that way, of course. Here's more:

"We still do not have a fully functioning single market for capital," Hill told a conference of EU officials and business leaders. "I will be bringing forward proposals to deliver a capital markets union; a project for all 28 EU Member States."

Channelling more money into small companies is seen as crucial for Europe's efforts to avoid economic stagnation because small and medium enterprises provide two out of every three private-sector jobs in the European Union.

Following the worst financial crisis in a generation, banks are reducing riskier lending to build up capital buffers, a problem in a continent where banks account for 80 percent of corporate loans.

Officials say a capital markets union would also mean the EU moving beyond public subsidies and loans to coordinate financing for companies and infrastructure through project bonds, public-private partnerships and infrastructure funds.

Jeroen Dijsselbloem, who chairs the meetings of eurozone finance ministers, said the capital markets union would need a single European supervisor and the creation of a pan-European insolvency law that would replace national laws.

"This is crucial to create the market that we so badly need in parallel to the bank lending system," he said.

Indeed, enlargements of power are always "crucial" from what we can tell. And often, when it comes to the EU, the larger they are, the less they seem to be commented on by the mainstream EU and Anglosphere media. The intention to create a "single European supervisor and … a pan-European solvency law" is significant, yet coverage in the mainstream media of this startling program has been sparse.

Perhaps those charged with dispersing acres of newsprint simply find the EU's intention unimportant or at least un-newsworthy. But we can think of little that is MORE important when it comes to the EU then facilitating fund-raising among euro-entrepreneurs.

It is also likely to be significantly invasive. In fact, the article explains that the EU is sure to try to generate significant information on small- and medium-sized companies. In other words, if loans are to be issued to the public, Brussels must assure investors that the information relied on for investment purposes is detailed and accurate.

Hill said his first steps would be to push a proposal for European long-term investment funds for infrastructure and businesses, to develop a framework for securitisation and to carry out analysis of private placements – the sale of securities to a small number of chosen institutional investors.

"I am interested in ideas for more market finance instruments – but not just in safe short-term debt, but in longer term stable debt that encourages long-term investment, and in real risk capital that encourages innovation."

Hill obviously has dreams of an additional EU financial superstructure. The intention is to create US-style capital markets where financing is controlled by industry financiers in concert with regulatory authorities. That's not what is being reported, when it's reported at all, but that's the likely outcome, in our view.

Is this a good evolution? US-style capital markets have never penetrated Europe because old-fashioned financing depends on partnerships where family and friends are solicited for the requisite capital. That's to some degree the European way.

But at a time when multinationals for a variety of reasons are not generating enough employment, another mechanism for growth must be found. An article at explains six possible areas for "policy initiatives in order of potential impact."

  • regulation of securities and specific forms of intermediation;
  • prudential regulation, especially of insurance companies and pension funds;
  • regulation of accounting, auditing and financial transparency requirements that apply to companies that seek external finance;
  • a supervisory framework for financial infrastructure firms, such as central counterparties, that supports market integration;
  • partial harmonisation and improvement of insolvency and corporate restructuring frameworks; and
  • partial harmonisation or convergence of tax policies that specifically affect financial investment.

This development, couched in the complex terms of financing vocabulary, is not especially transparent. But if we contemplate the current US system of financing, we probably can get a good sense of where EU policymakers want to go.

As this sector grows larger, control will increasingly be ceded to a small crowd of European financial insiders. These individuals and groups will create the same sorts of inbred strategies and arcane financing facilities that are currently used on Wall Street.

The reality is that the additional strategies will eventually be concentrated in the hands of a few too-big-to-fail banks that will have a significant mercantilist relationship with Brussels. This is the plan, couched in the vague phraseology of bureaucracy. No doubt, like so many other EU plans, it will be reported on with increasing enthusiasm as legislative agendas near completion.

The faux-enthusiasm will eventually reach a fever pitch, at which point Germans might realize that the planned capital-markets structure contravenes numerous founding principles of the current EU.

As with so much else of what has been floated regarding the EU, the stated purpose – facilitating capital raising for the entrepreneurial sector – will give rise to increased and possibly illegal centralization across the spectrum of EU nation-states.

After Thoughts

Even more disturbingly, the idea of US-style capital markets will create US-style financial risk of the sort that facilitated the central banking credit cataclysm of the 2008 financial crisis.