The capital markets union


This report from the UK think tank the Centre for European Reform looks at whether the EU should shut out the City of London.

Brexit means Europe’s largest financial centre will be outside the European Union. Rather than trying to develop its own large-scale capital market, the EU should work with British regulators to keep capital flowing between the bloc and the City of London, including formal structures to govern supervision of institutions active in both markets. That’s the key conclusion of a new Centre for European Reform policy paper entitled, ‘The capital markets union: Should the EU shut out the City of London?’ by Sir Jonathan Faull, former director-general for financial services at the European Commission, and financial regulation expert, Simon Gleeson. The EU’s capital markets union, launched in 2014, aimed to wean European companies off bank lending and encourage more cross-border capital market flows. This would help make the European economy more stable by allowing the costs of economic shocks that affect one region or country to be borne by investors across the EU. But progress has been slow, and now the UK’s imminent exit has probably ended the prospect of the development of a global-scale capital market within the EU.

That raises a big question: should the EU keep London at arm’s length and develop its own internal capital market, or open up the EU’s market to London and the rest of the world? A closed market would allow the EU greater control, but it would not fully protect the EU from global market fluctuations. EU-only capital markets would also be smaller and less liquid, which would raise the cost of capital for businesses. An open market would keep capital costs down, but the EU – justifiably – wants control over the risks taken by financial institutions serving its market. Faull and Gleeson argue that the UK offers the EU involvement in the formulation and implementation of regulation in London markets. They propose a joint policy-making forum between the UK and EU regulatory authorities, with formal structures governing supervision of institutions working in both markets.

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