David Cameron fought tooth and nail to stop Jean-Claude Juncker becoming president of the European Commission but the former Luxembourg prime minister could end up being the biggest boon to the City of London for a generation. Not only has Juncker embraced the idea of creating a “capital markets union”, he has now proposed giving Jonathan Hill, the incoming British Commissioner, the job of making it a reality.
The European Union suffers from underdeveloped capital markets. Everything, from shares and company bonds to venture capital and securitisation (where bank loans are packaged up and sold on the market), is a fraction of the size of its American equivalent. The goal of capital markets union is to build up these sources of finance so that they can play a bigger role in funding jobs and growth. If that is achieved, the City – the home to the bulk of Europe’s capital markets – will enjoy a boost equivalent to that delivered by the Big Bang deregulation launched by Margaret Thatcher in 1986. More jobs, more wealth and more tax revenue will flow to the UK. At present, the term “capital markets union” is a slogan searching for policy proposals. That’s why Hill’s role is so important. He can fill in the blanks, steering capital markets union in a free-market direction.
It might seem odd that Europe is embracing capital markets. Don’t eurocrats want to snuff out our financial industry with their financial transaction tax and ban on big bonuses for bankers?
Not quite. Yes, there is an anti-market streak across the Channel but opinion is shifting. Policymakers understand that Europe’s weak and bloated banking system is a liability. It helped cause the euro crisis and is now a drag on recovery. If banks aren’t going to be able to fund jobs and growth on their own, capital markets are the only alternative.
What’s more, the European Central Bank has become a keen advocate of markets as it tries to revive the eurozone economy. It is reluctant to follow the Bank of England and buy government debt. Instead, it would prefer to ape the US Federal Reserve and purchase market instruments. The snag is there isn’t much to buy. That’s why it is working with the Bank of England to revive the securitisation market. So, as Hill takes up his new post, he will be pushing on a half-open door. His aim should be to fling it wide open by explaining why markets will be so valuable for all the EU. Then he needs to set out an action plan for delivering capital markets union by the end of the new Commission’s term in office in 2019.
A good model is what Arthur Cockfield did when he set 1992 as the date for creating the single market when he was Britain’s Commissioner.
Three overarching principles should guide this action plan. First, it should free up markets – for example, by giving investment firms a passport to operate across the EU if they want to lend to business.
Second, it should revise some of the heavy-handed rules that have been agreed or proposed in recent years. A good candidate is the financial transaction tax, which would gum up markets.
Finally, it should respect the principle that decisions should only be taken in Brussels when that is demonstrably better than leaving them to national capitals. So there’s no need for a new EU-wide body to supervise markets.
Capital markets union could be a great prize for Britain – albeit only one we’ll get to enjoy if we stay in the EU.
Hugo Dixon is the author of The In/Out Question: Why Britain should stay in the EU and fight to make it better