Money management firms, think tanks and representative associations are taking the temperature of ambitious European plans to strengthen the region's economy and stimulate investment, particularly in light of the U.K.'s decision to leave the European Union.
The European Commission launched its Capital Markets Union action plan in 2015, outlining aims to "build a true single market for capital" across the 28 member states. By promoting stronger capital markets to complement the region's bank financing, the commission aimed to unlock more investment from the EU and the rest of the world, mobilizing capital in Europe and channeling it to companies and long-term sustainable projects; better connect financing to investment projects across the EU; make the financial system more stable; and deepen financial integration and increase competition.
And while sources highlighted a number of opportunities for money management firms and institutional investors going forward, they also warned ongoing Brexit negotiations will need to be carefully navigated for the CMU to realize its ambitions.
"We need to think carefully about what we want the overall CMU picture to look like," said Mike O'Brien, Europe, Middle East and Africa CEO and global co-head of solutions at J.P. Morgan Asset Management (JPM) in London. "Brexit presents a crossroads, and we have a choice to make. We can either move toward an 'open CMU' that aims to attract investment from abroad and keep Europe at the center of a highly connected global market, or we can turn our back on global markets and create a fortress Europe approach which will benefit no one."
Mr. O'Brien said JPMAM has been a "strong supporter" of the initiative, with particular focus on removing barriers and improving the cross-border market for investment funds — defined by the European Commission as investment vehicles — "created with the sole purpose of gathering investors' capital, and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities."
Said Mr. O'Brien: "Europe is a fragmented market with a proliferation of smaller funds scattered across the 28 EU member states, whereas the U.S. has many fewer, much larger, funds that have achieved economies of scale that make them more competitive."
'Elephant in the room'
The impact of Brexit on the CMU is "a bit of the elephant in the room," said Robert van Geffen, London-based director, policy at the Association for Financial Markets in Europe. "There are two schools of thought. One is that now we can really push ahead, harmonize areas where needed and go much further in the areas that create these barriers in taxation and solvency in securities law, as the U.K. might have been seen as skeptical about deeper harmonization in those areas. Then the other school of thought is that (Brexit is) placing the biggest capital market engine outside the EU, putting up potentially a barrier between (London) and continental Europe, which can't be great for integrated capital markets."
Mr. van Geffen said he does think there is a realization that, with the U.K. now to be separated from the EU, "there is an even bigger case for developing capital markets. Policymakers have realized there is an overreliance on banks, (and) officials are convinced CMU should continue even beyond 2019. That is positive."
However, Mr. van Geffen also is "slightly concerned that a lot of people who probably would have been working on CMU now need to devote part of their time on Brexit, which could slow down progress. And with the U.K. leaving, a big advocate of capital markets will be leaving the table, with also British (members) leaving European Parliament. I'm hopeful that policymakers are convinced there is a need to develop capital markets, but it is going to be an uncertain process ahead."
And William Wright, founder and managing director at think tank New Financial LLP in London, said the CMU project "has been dented by the departure of the U.K., which has the largest and deepest capital markets across the EU. This has increased the urgency of the need for CMU while at the same time pointing the project in a different direction." Mr. Wright said the initiative is now more likely to involve a more streamlined and centralized supervisory structure.
Despite Brexit-related concerns, should CMU plans continue moving in the right direction, money management firms and institutional investors will see a number of opportunities for investment and potential new business — with pension funds in particular playing a central role in fulfilling the CMU's goals.
One part of the initiative is to harness long-term capital for economic growth as well as unifying markets. Nicolas J. Firzli, Paris-based director-general, head of research at the World Pensions Council, wrote in an email: "There is the progressive realization in Brussels, Paris and Berlin that large pension investors, especially Northern European, U.S., Canadian and Australian pension funds, are 'sitting on trillions of euros of long-term assets,' so to speak, and that some of that money could perhaps be steered towards 'productive asset classes'" such as small and medium enterprises and infrastructure assets.
AFME's Mr. van Geffen said by putting the region's retirement assets to work in capital markets rather than "keeping them as cash in bank accounts … can really help in addressing the pensions problem that exists in Europe. In the U.S., people save a lot more in capital market products for their retirement than is the case in Europe, although there are a couple of cases in the U.K., Netherlands and Denmark which have substantial savings in capital markets."
New Financial's Mr. Wright added the CMU plan should increase competition and efficiency in EU capital markets, in turn reducing costs and increasing returns. "At the same time, reforms to current regulations on long-term investing will expand the range of asset classes that asset owners can invest in — such as venture capital and infrastructure — and address the regulatory and tax bias against equity investment."
Bigger and deeper capital markets mean "more business for asset managers," Mr. Wright said. If retirement and insurance assets in the 27 remaining EU member states were as large relative to the economy as they are today across the EU including the U.K., he said "that would translate into €2 trillion ($2.4 trillion) in additional pools of long-term capital," an increase of about 20%. "On the same basis, the value of assets under management in the EU27 would increase by about €4 trillion, an increase of more than 40%," he said.
Financing green energy
Another area of development under CMU is sustainable finance and green energy. "Solutions are needed now with the Paris climate goals. Being able to better link up investors and the money available for green projects with the actual projects, with capital markets acting as an intermediating linkage, can really help the EU achieve their climate goals," Mr. van Geffen said. The initial CMU plan in 2015 did not include sustainable finance, but a midterm review this summer moved that to an area for development.
But for money managers, the CMU could also be a threat to business. "On the one hand, by making it easier for firms to distribute and market funds across borders, it will reduce the cost and complexity of firms' business and increase the size of their potential market. On the other hand, by increasing competition in the industry, it could accelerate the erosion of margins and increase pressure on transparency," warned Mr. Wright, noting that the EU is investigating the possibility of a pan-European price comparison website for investment funds.
J.P. Morgan's Mr. O'Brien said while progress has been made, there's still a way to go on achieving the ambitions of the CMU initiative. "We support much of the regulatory reform agenda to date, and we believe that the financial system is now safer and more resilient, and that capital markets are more robust and transparent than ever before. But we believe more work could be done to realize the goal of an open and efficient European CMU. Importantly, we believe CMU's objective to remove barriers and reduce the cost of deploying capital across the EU can only be fully achieved if CMU becomes a template for wider market access."