Further considerations on “C.M.U.” and “Brexit”
The Commission published on September 30th its “Capital Markets Union Action Plan”. Simultaneously, the Labour and Tory party conferences have accelerated the debate over the in/out EU Referendum. These two topics are closely related.
The published Action Plan is disappointing. It amounts to a catalogue of individual measures aiming at harmonising rules and practices within the current fragmented markets of its 28 Members. While most proposals are derived from the prior “Consultation” and are largely uncontroversial, they fall a long way short of creating a capital market that could deliver its main stated objective: increasing the ease with which capital can be raised by developing credible alternatives to bank financing that still dominates the European markets.
Maybe there has been, right from the start, a semantic misunderstanding nourishing unachievable expectations: the proposal consists of creating a capital markets “Union” and not a “Single” capital market. The confusion originates from two sources:
- The implied (but false) parallel drawn with the “Banking Union”.
- The stated “benchmark” which is the U.S. capital market.
The efficiency of the US market is based on several key features which are not addressed in the EU plan:
- First, it covers an area with only one currency (rather than the 10 in the EU).
- Secondly, it is subject to a “federal” regulatory/supervisory system (rather than relying on a single “future” rule book enforced by “national regulators”).
- Thirdly, documentation and information circulate in a single language favouring wide distribution throughout the whole area (rather than requiring expensive translation costs to create an illusory level playing field).
- Fourthly, there is broad coherence of taxation of dividends and capital gains throughout the U.S.A. (rather than the juxtaposition of 28 sovereign taxation regimes).
- Fifthly, the first four features are the necessary preconditions to create a deep and liquid market throughout the area (rather than pretend that CMU will provide “equal access” to operators throughout the EU).
Another weakness of the plan is the imbalance between measures aimed at reducing funding costs and measures concerning investor protection. Failure to address the “currency risk” is a major impediment to trans-border investment. In the event, this risk is not limited to fluctuations between EU currencies but remains a major question within the Eurozone itself as long as the process of EMU integration is not completed. In particular, bank lending which remains a central feature of CMU, will remain fragmented as long as the long term survival of the € is not firmly entrenched. In the light of the urgency, the “5 Presidents Report” spreading the further integration of the Eurozone over 10 years is a long way from providing a credible answer.
By failing to address these questions and actually recognising that they are too complex to be tackled at present (or should at least be shelved pending the UK Referendum), the whole project loses much of its value and it is highly questionable that even a full implementation of the action plan would deliver the expected results.
Turning now to the implications of Brexit, it should be clear to all concerned that the emphasis put currently on bringing forward CMU is a hardly veiled attempt to bind the UK further to the EU by giving the City an opportunity to assert its dominance over European capital markets. Not only will this endeavour fail (protecting the City is not so popular in the UK) but it may prove highly counterproductive. A better approach would be to intensify the campaign to keep the UK “in”, which is certainly in both the EU’s and the UK’s interests. The current pandering to the UK’s demands is underpinning the belief that the consequences of Brexit may not be dire for the U.K. and is an encouragement to risk the “out” vote.
Leaving aside the possibility of a subsequent breakup of the UK itself, there are three main Brexit scenarios with highly divergent probabilities:
- The UK leaves and successfully negotiates with the rest of the EU a “Trans Chanel Trade and Investment Partnership” (TCTIP) maintaining broadly a status quo but restoring full sovereignty to the UK in all other areas. Despite unquestionable benefits accruing to both parties, the chances of securing such a deal are no higher than 15%.
- The UK leaves and creates strong resentment within the EU. This pushes the EU to accelerate its integration extending the Eurozone to all other EU members – as foreseen by the Treaty – and isolating totally the UK which will have no say in its policies and regulations. In particular it creates a € based integrated capital market further weakening the City’s claim to be the financial centre in the European time zone. In light of the multiple fractures crisscrossing the EU the chances of such an occurrence may be limited to 35%, though one should not underestimate the boost that Brexit might give to the “federalist” cause on the continent.
- The UK leaves and this turns out to be only the first Member State to initiate the exit process enshrined in the Lisbon Treaty. In the current climate in which we are witnessing a surge in national-populist movements across the EU, an increase in tensions on immigration (reinstatement of border controls), a north/south divide within the Eurozone, disagreements over Ukraine and the Middle East, etc., the example of Brexit is likely to set a precedent that will be seized upon by all those who have been disappointed by the EU dream and the lack of statesmanship of its leaders. This scenario - whether or not accelerated by additional tensions within the Eurozone – implies the more or less orderly demise of both EMU and the EU with catastrophic economic, financial, social consequences, not to overlook the potential for renewed armed conflict on the continent. In these dire circumstances, the UK would need to negotiate new trade deals with each of the 27 other member states which, more than likely, will have had to impose exchange controls to deal with the chaos. The UK would lose its major export market, having the meagre consolation of having avoided membership of EMU. I evaluate the likelihood of such a possibility at 50% in the event of Brexit.
It is this last scenario which, despite being the most likely in case of Brexit, seems to have been ignored by the British in their calculations and could be the source of unwelcome surprises. In conclusion, it is time to cease arguing about the merits of Brexit. There are no winning scenarios, only more or less painful ones!
What is at stake is the future of Europe as a civilisation, a prosperous and powerful political, economic and social continent that can uphold on the international stage its values and interests standing up when necessary to the United States, China, Russia, India, Japan, Brazil as well as terrorism.
Time is running out fast. Let those who purport to lead us stand up and be counted!
Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.
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