Capital Markets Union : An Action Plan of Unfinished Reforms

The European Union's Capital Markets Union (CMU) is a broadly-based regulatory reforms framework that emerged from the Global Financial Crisis, the Great Recession and the Eurozone Sovereign Debt Crisis of 2008-2014. Launched in 2015, the CMU deployment date is set for 2019, although some aspects of the reforms have been implemented in 2016-2018.From the start, the CMU took aim at a series of structural bottlenecks exposed by the crises:1. Over the longer term, the CMU aims to deepen European capital markets by increasing cross-border finance and investment, and by attracting new capital from outside the European Union; and2. The CMU aims to broaden the investment markets by rebalancing investment funding channels available to European firms away from intermediated (or bank-issued) debt, toward equity and direct debt (bonds) funding.Our analysis covers the impact of the CMU, with a special focus on Small and Medium Enterprises (SME) finance since 2015. Using a range of data sources, we show that, to-date, the CMU has failed to deliver on the main twin objectives of increasing quality and quantity of funding accessible to the SME firms. Over time, the CMU has been morphing into a policy vehicle that simultaneously targets supports for the SME sector, while providing increased private financing for large-scale state- and EU-sponsored infrastructure projects. This undermines the CMU effectiveness in reducing the extent of the systemic risks build up and spillovers (contagion) in the financial sector.The lack of progress on the SME- and corporate investment-centric objectives, and the drift in European reforms away from the SME sector financing needs, are apparent in the specific aspects of the European Commission's 2015 Action Plan and Strategic Plan 2016-2020. We argue that in recent years, the CMU core pillars (including the twin-objective of broadening and deepening SME finance and markets) have been displaced by reforms more favourable to the banking sector and to the larger financial institutions (e.g. pension and insurance funds).We propose refocusing of the CMU development and deployment in 2019 and onwards toward the original core objectives of the CMU, summarised in the bullet points above