This article was first published in Paperjam on 2 April 2024.
The Efama trade group has several recommendations on how to build stronger capital markets in Europe, and help individual investors at the same time.
Europe is faced with unprecedented challenges and needs to mobilise hundreds of billions of euros each year to finance the green and digital transitions, to cope with an ageing population and bridge the pension funding gap, as well as strengthen its strategic autonomy in areas such as defence, technologies and supply of critical materials.
Given the current levels of indebtedness of most member states, the bulk of these investments will necessarily have to come from the private sector. Hence why more and more voices in political and business circles are calling--and rightly so--for urgent and bold actions to develop deeper, more integrated and liquid capital markets in Europe. Despite a decade of intense EU legislative work and two successive Capital Markets Union action plans, European capital markets currently remain too fragmented and clearly undersized when compared to the US.
“We absolutely need to find ways to turn more EU citizens into first-time investors”
- Vincent Ingham, Director, Regulatory policy, European Fund and Asset Management Association
The objective is laudable, but how do we get there? First, we absolutely need to find ways to turn more EU citizens into first-time investors. Increased retail participation in capital markets is a necessary condition for deeper and more liquid capital markets. European households enjoy one of the highest savings rate in the world (approximately €14trn were held in cash and bank deposits at the end of 2022) whereas investment levels remain too low in most countries.
Shifting just a fraction of these savings from bank deposits to investments would already make a considerable difference not only for governments, European firms or infrastructure projects in need of cost-effective financing but also for investors themselves by helping them to secure their financial future, particularly in retirement. Finally cracking that nut will require a combination of ambitious policy measures both at EU and national level to promote an investment culture that empowers citizens to confidently take ownership of their financial wellbeing. Sound financial advice, regular financial health-checks, improved financial literacy, reform of occupational pension systems (through the implementation of auto-enrolment mechanisms) and tax incentives (for instance, by establishing tax-exempt investment plans for individual retail investors) are, in our view, key levers of success.
Streamline regulations
To unlock the full potential of sustainable finance and achieve the objectives of the Paris Agreement, another priority for the next EU legislative cycle should be to streamline existing regulations to improve their overall consistency, close the ESG data gap and develop more investor-friendly disclosures.
Lastly, if we want vibrant capital markets in Europe, it is essential to ensure the EU remains an attractive place for investing and doing business. EU financial market players, and asset managers in particular, need an enabling regulatory framework allowing them to compete on an equal footing with their international peers. For this to happen, new EU regulations should be subject to a competitiveness check, remaining barriers to cross-border investment should be tackled and reporting requirements reduced.
Asset managers serve millions of clients in Europe and all over the world and provide a critical source of stable, long-term funding to the European economy. As such, we are deeply committed and stand ready to help build stronger capital markets in Europe. The clock is ticking. So let’s roll up our sleeves and make it happen.
Vincent Ingham spoke at the Association of the Luxembourg Fund Industry’s Global Asset Conference on 20 March 2024. This guest contribution first appeared in Delano’s Spring 2024 print edition.
