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Conference Paris, November 30th 2021
unleashing Europe's potential
Capital Markets Union:
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr), Déborah Guedj
(deborah.guedj@banquefrance.fr)
Ladies and Gentlemen,
I am delighted to be with you today and I extend my warmest thanks to all the
participants for accepting the Banque de France's invitation to talk
about the
Capital Markets Union (CMU), as we look towards the French presidency of the
European Union. In particular, I owe a special thanks to Mairead McGuinness,
our European Commissioner for Financial Services, Financial Stability and
Capital Markets Union, for honoring the Banque de France with a keynote
speech.
The project to unify our capital markets is actually as old as the European
construction project itself. In 1966 already, a group of experts, led by the Italian
Claudio Segré, tasked by the Commissioni produced a report in which they
pledged for the development of a European capital market. I will try to answer
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briefly three questions: why, what and last but not least how?
**
I. Why does the European Union need the CMU?
Although the monetary union was fully achieved with the creation of the euro in
1999, the EU still struggles with financial integration. This assessment is nothing
new but has legitimately attracted more attention with Brexit and the Covid crisis,
EU financial markets' strengths but also
both of which revealed not only the their
weaknesses.
From a central bank point of view, a deeper and more integrated financial
system is needed, as integrated capital markets improve the transmission of our
single monetary policy to all parts of the euro area. Furthermore, as the Optimal
Currency Areaii theory states, and the US example shows capital mobility
constitutes one major adjustment channel for absorbing asymmetric shocks.
Our Economic and Monetary Union as designed in Maastricht exactly 30 years
ago can be seen as a three-hulled boat. Its strong, robust central body
consists of key monetary assets: our single currency, trusted by a growing
majority of 79% of European citizensiii, and our credible monetary policy as
conducted by the Eurosystem. However, this monetary policy cannot be the only
stabilisation tool, otherwise we run the risk of it being overloaded. Our three-
hulled boat needs to be complemented with two well-designed and well-
functioning floats.
On one side, we need a public float including a more permanent common
(which doesn't mean
fiscal capacity an additional yearly budget). It would help
us to better cope with macroeconomic shocks. In this respect, the NGEU and
SURE programmes have been major steps forward and are paving the way for
such a capacity.
On the other side, a private float is necessary to foster a better capital
allocation in the EU. The euro area has abundant savings: the surplus of
domestic savings over investment amounted to EUR 340 billion in 2019.iv Yet
the world's largest pool of savings is not
sufficiently channelled to productive
investment. Over the last decade, the investment-to-GDP ratio has been
declining, especially among non-financial corporations - before increasing
again. And we have huge investment needs ahead of us if we are to achieve
two decisive transformations: the ecological transformation and the digital
transformation.
Furthermore, the European Union is lagging behind Asia and the United States
in terms of innovation. The level of R&D spending constitutes a strong
explanatory factor: in 2018, the total amount of public and private R&D spending
in the European Union was equivalent to 2.2% of its GDP whereas it amounted
to 4.5% in South Korea or 2.8% in the United Statesv. As I said in my Bruges
it's time for us to remember
speech last Marchvi, that Schumpeter, alongside
Keynes, was also a European.
II. What? Some key priorities for CMU
I will only speak briefly about this part as I am sure that Commissioner
McGuinness will get to the heart of this matter in her keynote speech. And I
would like to pay tribute to the tireless efforts of the Commission: its CMU action
plan launched in September 2015, its new action plan in September 2020, the
-
proposals you made last week first, to increase market transparency through
a European Single Access Point and a consolidated system on transactions
taking place on trading platforms across the EU ("consolidated tape"); second,
to increase long-term cross border flows through the ELTIF framework and the
partial harmonisation of insolvency rules. Together, they shed light on our
possible future agenda, perhaps even more than on our necessary agenda. I
will therefore make two observations:
1/ Equity financing is the most appropriate tool for innovative projects, given
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their higher level of risks which requires a significant upside in case of success
-and the necessity to finance them with a long-term perspective. And here, we
dramatically lag behind the United States: in the second quarter of 2021, equity
financing only represented 91% of euro area GDP, versus 220% in the United
Statesvii. And the biggest EU venture capital firm is 3 times smaller than the 10th
US venture capital firm, by money raised over a decade.
Table: 10 biggest US and European venture capital funds (by sum of capital
raised over 2010-2019 period)
UNITED STATES EUROPE
Venture capital fund Country B€ Venture capital fund Country B€
US fund 1 US 15,2 European fund 1 UK 1,6
US fund 2 US 12,1 European fund 2 FR 1,4
US fund 3 US 11,4 European fund 3 UK 1,4
US fund 4 US 9,7 European fund 4 DE 1,4
US fund 5 US 8,4 European fund 5 FR 1,3
US fund 6 US 6,9 European fund 6 SE 1,2
US fund 7 US 5,7 European fund 7 UK 1,2
US fund 8 US 4,8 European fund 8 CH 1,0
US fund 9 US 4,2 European fund 9 DE 1,0
US fund 10 US 4,2 European fund 10 DE 0,9
Source: Crunchbase, BDF's calculation
2/ The CMU should serve our strategic autonomy, and allow for a
strengthening of the European financial sector. Although Brexit was bad news
for Europe, it is also an opportunity to rebalance the weight of the different
financial centres. Such rebalancing has already taken place in certain segments,
and has to be extended to clearing activities. Europe needs a strong and
polycentric network on the continent: in addition to the successful Monetary
it's time to build
Eurosystem, a Financial Eurosystem.
Therefore, the CMU goes hand in hand with the completion of the Banking
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Union. After a strong initial impulse having achieved an efficient first pillar
supervision, Banking Union now lacks momentum. I could even say, to be frank,
viii
that it is totally on hold. Last September I advocated the creation of large pan-
European banks. We, the public authorities need to take a new approach, built
on simultaneous and parallel progress on several fronts, rather than a sequential
and "integrated" approach excessively focused on
European deposit insurance
scheme (EDIS). Let me welcome on Banking Union and CMU the positive
commitments in the new Coalition Agreement on banks in Germany. In parallel,
with the view to ensuring a sound European banking system, the Commission
has published a proposal for the transposition of Basel III. In substance, it is the
delay in the implementation timetable that has drawn attention. I believe that this
delay - guided by realism - is minor if (and only if) the temporary exemptions
proposed by the Commission remain temporary, particularly for housing loans.
This is key to Europe's credibility and compliance with the international
agreement of December 2017. I would also like to welcome the application of
the output floor at the consolidated level: it has already been contested, but it is
in the spirit of the Banking Union and the 2017 agreement.
III. How?
Regarding the benefits and need for the CMU, everybody in Europe agrees, be
it in the Ecofin or in the Governing Council. Concerning its content, the pieces
- I've
of the puzzle numerous, and significant - are on the table, as mentioned.
The first CMU action plan in September 2015 had already identified a number
of improvements that are still valid today; and yet, its main weakness was not in
its content but in the lack of implementation of measures. The deliverables
remain too slow, and disappointing. What are the reasons for that, and hence
how do we move forward?
First and foremost, the issue is seen as technical, and even sometimes boring.
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It is seen as politically less attractive than say the Green Deal, while there
should be a link. "Nobody can fall in love with the single market", Jacques Delors
pointed out. This quotation can today easily be extended to the CMU.
Second, we probably still need to better prioritise our actions ex ante, and
monitor them ex post. The CMU will not be implemented overnight and remains
a long term project. Developing a with selected
monitoring framework
priorities and indicators would therefore be warranted, especially as it will enter
an important phase in 2022, with several legislative texts under discussion.
I would now like to return to the single market. We may forget that it was a
collection of about 300 texts, not all of which were very appealing... But the
genius of Jacques Delors and the Commission was to hoist a political "flag" over
this technical ensemble, a banner that gave it meaning: the four freedoms of
movement of goods, services, persons and capital.
Fundamentally, today, I believe that this meaning lies in the link with the two
decisive transformations for Europe: ecological - where we are ahead of the
game with the Green Deal and Fit for 55 -, and digital - where we are lagging
behind the United States and China. Almost all European voices and
governments are committed to these two major projects. It is time to explain that
the CMU is a decisive lever: not the only one - other instruments are needed, of
-
course - but it is essential if we are to mobilise the savings resources which
we do have! - to cover the huge investment needs of these two transformations.
In order to build this bridge between the goals and the instrument, it may be
necessary to change « the brand » - Capital Markets Union is not especially
I proposed some time ago to rebrand it "Financing
revealing in terms of goals.
Union for Investment and Innovation", or "Financing Union for Sustainable
Investment" - Christine Lagarde suggested a "Green Capital Markets
Union".ix
These are only contributions for your own thinking, Ms Commissioner. But I am
the success of CMU now doesn't depend
sure there is one thing we agree on:
on an ever-improving technical agenda; it depends on a much stronger political
impetus, from all European authorities. Our first duty is to give our fellow citizens
the purpose and the meaning of the CMU project, and hence the desire for it.
**
This brings me, in conclusion, to the forthcoming French Presidency of the
European Union. It will not be able to solve everything, and will be part of a
longer continuum. But rest assured that Capital Markets Union, with its clearer
goals, will be one of our key priorities. The Commission and the European
players can be sure that they will have the full support of France and the Banque
de France. I thank you for your attention.
i
Report of a group of expert appointed by the ECC Commission, The Development of a European
Capital Market, November 1966
ii
Robert Mundell, A Theory of Optimum Currency Areas, American Economic Review, November 1961
iii
Eurobarometer, European Commission, May 2021
iv
This amount of EUR 338.2 billion in 2019 corresponds to the net lending surplus of the euro area
(i.e.: Net lending - Net borrowing or balance of the current account + balance of the capital account).
Source : Balance with the rest of the world, National Accounts, Ameco.
v
European Commission, Science, Research and Innovation Performance of the EU, May 2020
vi
Europe's growth gap: reconciling Keynes and Schumpeter,
François Villeroy de Galhau, speech,
March 2021
vii
Euro area excluding Germany. Equity financing of non-financial firms are consolidated data
including listed and unlisted shares, and other equity.
viii
Villeroy de Galhau F., The Banking Union: Time to move forward again, speech, 10 September
2021
ix
Towards a green capital markets union for Europe", speech, 6 May 2021
Lagarde C., «