Challenges for European Capital Markets

A subjective summary of DSW/Better Finance’s : International Investors’ Conference

Opening Speech: N. Cazenave (ESMA)

The EU’s economic situation is best described by the Letta and Draghi reports.

One major feature of the reports is the existence of high savings levels in the EU which are potential resources for investments.

To channel these large amounts of savings directly to investments, the functioning of the EU’s capital markets need to be improved through:

• An EU label for financial products.
• Simpler advice on available financial products for retail investors.
• A decrease in costs and fees on financial transactions which will improve
  the “value for money” for retail investors. This change will also need a new legislation in this domain.
• A simplified supervision of financial/capital markets on the EU level will be needed.
• In general, simpler regulations, especially in the sustainable finance domain should make financial markets more efficient.
• Linked to this argument is the need for a reduction of the fragmentation of EU’s capital markets through the creation of an integrated capital market (Capital Market Union or Savings and Investment Union)
• Investors’ confidence should be improved through the creation of a trustworthy environment.
• Therefore, a higher level of investments in financial education will be needed to improve the financial literacy of the EU’s population and hence increase the number of potential retail investors.
• A harmonization of taxation on capital (revenues) on the EU level will also increase the transparency and hence the efficiency of financial markets.

Panel: How to build resilience and strategy in Europe’s complex landscape?

About resilience and strategy

Barnnier (B) mentioned that the future of European growth will be in service sectors not in manufacturing sectors. Consequently, EU companies have to combine traditional manufacturing with services for their clients, mainly through digitalization.

In this context, the EU has the advantage of a well-functioning financial system and of good government governance. The EU’s Capital Market Union is a basic condition for the future of the EU’s economy, therefore more financial education for potential (retail) investors will be needed.

Wolff (W) insisted on the importance of the energy transition and the development of green technologies (biotech and green tech). These sector present major investment opportunities and sources of economic growth. W observed that, in this context, firms have to derisk their activities which is different from decoupling their activity from other continents.

W also mentioned the need for an improved collaboration in three domains: a common energy market generating lower prices, a common position on migration and a common defence project.

Trump may be an opportunity for Europe, especially for petroleum companies (BP, Shell), for infrastructure investment and for defence contractors.

Von Roessel (VR) was concerned about a major challenge for Europe’s chemical industry: sustainability.

VR insisted on the problem of European regulation with its consequences on costs (mainly energy costs) and on international competitiveness mainly for the chemical sector.

A strong Europe needs to talk with one voice when negotiating free trade agreements, (Mercosur, for example), tax harmonization, but not to generate more regulation.

About sustainability

B: The EU’s Green Deal presents good intentions, but its corresponding regulation presents too many details. Anyway, there will be a need for a change in industry boundaries. Firms will have to shift their main activity from production to service providing.

W: Sustainability has become a basis for an improved business collaboration between subsidiaries.

VR recognizes the importance of sustainability, but competitiveness is still important in this context. One solution should be the use of AI in the chemical industry.

W reminded the audience that green tech and investments in infrastructure should be the future of Europe’s economy.

Keynote speech (video): A. Jour-Schroeder, EU Commission

Mrs Jour-Schroeder (JS) prefers to speak about a Savings and Investment Union than about a Capital Market Union.

According to the Letta and Draghi reports, an excess of savings compared to investment can be observed on capital markets. To improve the allocation of resources, affordable financial products and services are needed.

JS considers that for the moment, politicians support the idea to improve the Capital Market Union or the Savings and Investment Union.

Panel: The Eu agenda 2024-2029: Revamping the CMU

Massen (M) highlighted the fact that there is a difference between the American and the European approach of investing. US investors are looking for investment opportunities whereas European investors are mainly concerned about the conservation of their capital. But all conditions to benefit from investment opportunities in Europe are fulfilled.

M expressed the need for European IPOs, based on a unique set of rules so that the conditions are the same in each member state of thew EU.

M also gave a comparative example of private pension plans (US vs EU) to illustrate the question of different mentalities in the US and in Europe.

Veil: The Letta and Draghi reports are based on a common business code, but their recommendations are not realistic if we consider the structure of the EU’s decision taking.

Panel Investor engagement: International perspectives

 This topic mainly focussed on institutional investors.

The fact that there are no precise rules for sustainability/ESG reports was criticized and the importance of transition plans, mainly for large firms, was also highlighted by the panel.

Panel: Digital transformation: Boosting Europe’s Competitive Edge

D’Arcy: To benefit from the digital transformation in Europe, more investments in infrastructure and education will be needed.

One major risk must be evaluated: how does AI use available private data?

Steiger: For the moment, the main AI players are in the US and in China. Hence, AI talents are outside of Europe. But they are needed in Europe as AI can improve sustainability and increase productivity, because “Data is King”.

There is also a need for ESG and AI expertise for board members.

Oelsener: To foster the needed innovations, the “right” regulation must be developed.

Subjective conclusion:

• There is a need for a “real” Capital Market Union (or Savings and investment union) within the EU.
• The question of a European regulation accepted by all stakeholders has to be tackled.
  For the moment, there are differing views from the supply side (savers/investors) and the demand side (firms) in the following domains: financial products and services (taxation included), ESG/sustainability rules/criteria.
• The future of Europe’s economy is based on the supply of services (digitalization) even for the traditional manufacturing industries.
  Therefore, investments in Europe should mainly focus on improved infrastructure including data infrastructure, R&D in green and biotech to foster growth. Again, the question of regulation pops up.
• There was no explicit discussion about productivity.

Carlo Klein

Investas Board Member