Capital Markets Union: A new frontier for the Single Market?

26 March 2015

On the 18th February 2015, the European Commission published a Green Paper on building the Capital Markets Union and with that, the debate has officially begun. The CMU (in short) is a plan of the European Commission that aims to create deeper and more integrated capital markets in the 28 Member States of the EU.

With the CMU, the Commission aims to explore ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses, particularly small and medium sized enterprises (SMEs).

In a nutshell, the capital markets union is an attempt to deliver enough capital to the market, at the right price.

The best ideas and the best businesses in the EU should be able to benefit from direct, fast and cheap access to finance. A person in Sweden should be able to invest in an idea developed in Cyprus (either through regulated markets, direct public offer, crowdfunding or otherwise). Sounds promising but in practice, the markets in Europe are greatly fragmented, making it highly questionable whether this complete capital markets union can be achieved. Company Law, Taxation, Insolvency Law to name a few, are important areas that are not harmonized between member states. Until such harmonization does take place, we cannot speak of a capital markets union.

SMEs in particular were and still are heavily reliant on bank lending at a time when banks are deleveraging, thus causing a significant funding gap for SMEs in some MS (an ECB study concludes that SMEs rely on debt finance for 80% of their funding needs). Most SMEs are so small in size that they will never be able to access the capital markets anyway and will continue relying on bank lending.

The aim of the CMU is to introduce reforms in the following fields:

  • Reduce the fragmentation of the financial markets
  • Diversify the offer of financing for the whole of the economy

  • Improve SMEs' access to funding

  • Strengthen cross-border flows of capital in the single market


In the short term, measures will be proposed to breathe new life into the securities markets in Europe (securitzation), improve standardised credit information on SMEs, develop effective private investment regimes and revise the 'Prospectus' Directive primarily to reduce the administrative burden on SMEs.

Securitisation is a way that banks turn loans into securities and then sell bundles of loans on to other investors. It improves financial liquidity, but is criticized for helping the 2008 financial crisis to spread by on-selling bundles of sub-prime mortgages in the United States.


Securitisation can be a possible source of liquidity for banks providing finance for smaller companies. It is also very attractive for banks because through securitization they can transfer risk from the bank’s balance sheet to capital market investors. The capital released can then be recycled and reallocated into further lending by the bank, thus generating even more funding for the economy.

Although this sector was active before the financial crisis of 2008, it has shrunk to insignificant levels, partly due to the damage caused by its association with the US mortgage crisis (the issuance of securitised products totalled €180 billion in 2013 in the EU, well below the €594 billion of 2007). 

If Europe can make the system more fluid and more attractive by establishing secure and transparent principles for securitisation to avoid the mistakes of the past, then capital that is currently frozen could be released to facilitate the financing of economic operators, but one can’t help but wonder whether the problem of financing for companies is one of plumbing or rather a tap that nobody turns on.

At the end of 2014, the ECOFIN Council said a well-regulated securitisation market should be facilitated to boost financing for small and medium-sized businesses by spreading risk out over the markets. The EU ministers of Finance invited the Commission to draw up by the summer 2015 draft legislation for simple and transparent securitised products.

Review of the company Prospectus Directive. In its consideration of how to make it easier for European companies to access the financial markets, the Commission is considering a review of the European rules requiring quoted companies to publish a prospectus. At the end of 2010, changes to the EU company prospectus directive raised the threshold at which an issuance is exempt from the requirement to publish a prospectus from €2.5 million to €5 million. A key focus of the review will be to eliminate unnecessary administrative burdens for companies raising capital across the EU, looking at when a prospectus is required, whether all prospectuses need to be approved and streamlining the approval process, and simplifying the information included in prospectuses.


Another action to be taken in the short-term is developing European “private placement markets” where a company makes an offering of securities to an individual or a small group of investors not on public markets. These private placements can provide a more cost-effective way for firms to raise funds and broaden the availability of finance for medium to large unlimited companies explains. European companies tend to look to the American markets, where they raised €15.3 billion in 2013. There is growing appetite for this type of finance in Europe, and countries like Germany and France already have rules, which raises the question of harmonisation at EU level. At the moment, most of the private placement regimes operate under the exemptions provided by the Prospectus Directive, but a more organised regime is perhaps needed.

In any case, the CMU is a very promising project that has the potential to become as important as the Single Market in the 90s.