By Viktoria Dendrinou
BRUSSELS—The European Union set out a road map for boosting capital markets across its 28 members Wednesday, in an effort to spur investment in the region and revive the bloc’s flagging economy.
Jonathan Hill, the EU’s financial services chief, outlined a set of initiatives that flesh out the so-called Capital Markets Union, his much-anticipated project aimed at helping companies raise cash in Europe by boosting nonbank financing and tackling obstacles to investment.
The plan—which is part of a broader push by the European Commission, the EU’s executive arm, to boost jobs and growth across the continent—is intended to encourage investments, particularly in small- and medium-size businesses, and help Europe’s sluggish recovery pick up.
The proposed initiatives, most of which are expected to materialize during the next five years, focus on reducing businesses’ dependence on bank lending and shielding the region’s economy from future credit crunches, like the one experienced during the financial crisis. They include further developing corporate bond markets, creating incentives for infrastructure investment, and enabling “alternative financing,” such as crowdfunding.
“Capital Markets Union is about unlocking liquidity that is abundant, but currently frozen, and putting it to work in support of Europe’s businesses, and particularly SMEs,” said Mr. Hill, referring to small- and medium-sized enterprises.
The proposals include reviewing investor-prospectus rules and reviving high-quality securitization, the practice of bundling loans into securities and selling them as bonds. Poorly administered securitization was highly criticized during the financial crisis, when it was held responsible for encouraging reckless lending decisions by banks.
The commission’s plan will also include examining whether differences between national insolvency and tax regimes can be harmonized to encourage more cross-border investment.
Improving financing for small- and medium-size businesses is central to the project, as they have more trouble borrowing from banks than do bigger companies, especially in crisis-hit countries. In the eurozone, over a third of SMEs didn’t get the full financing they asked for from banks in 2013, according to the commission. In Greece, more than two thirds of such companies didn’t.
An EU official said the goal of fully integrated markets in the EU by 2019 would be “excessively ambitious.”
“If you want to arrive at a situation where capital markets in the EU function exactly as capital markets in the U.S., you would have to address issues like taxation, insolvency law and securities law,” he said.
Still, analysts worry that differences in insolvency and tax regimes, which stem from different national legislation, will be hard to harmonize as any changes to these laws remain at the discretion of individual governments.
“The challenge for the commission is to develop a proposal that is both effective and achievable in the short to medium term, particularly when many of the obstacles to CMU are national differences in areas such as tax, insolvency, investor protection and market access, which will be hugely difficult, if even possible, to harmonize,” said Alexandria Carr, regulatory lawyer at international law firm Mayer Brown.
The commission is inviting feedback from businesses and lawmakers over the next few months, before coming up with more concrete proposals in the summer.