Nasdaq offers opinion on the EU Capital Markets Union

The financial and sovereign debt crisis has taken a heavy toll on EU growth performance. Significant GDP loss occurred in many developed countries, and became permanent. Support programmes for banks entailed non-recovered fiscal costs of ~5% of GDP or more in Belgium, Greece, Ireland, Luxembourg, the Netherlands, Austria and the UK.

Unemployment in the euro area increased from 7.5% in 2007, to 11.6% in 2014, and from 7.2% to 10.2% in the EU. Compared with 2007, 6.5 million more people are now unemployed in the EU.

Late in 2014 the European Commission announced a €315 billion Investment Plan to get Europe growing again, and get more people back to work. Commenting on the Plan, European Commission President Jean-Claude Juncker said: "If Europe invests more, Europe will be more prosperous and create more jobs – it’s as simple as that.”

To strengthen investment for the long term, the EU is focusing on capital markets, where they hope to provide new sources of funding for business, help increase options for savers and make the economy more resilient.

While the European economy is as big as America’s, Europe’s equity markets are less than half the size, its debt markets less than a third. The gap between EU Member States is even bigger still.

In early 2015 President Juncker set out one of his key priorities, the need to build a true single market for capital, a Capital Markets Union for all 28 Member States.

Through the Capital Markets Union (CMU), the European Commission is striving to increase the benefits that capital markets and non-bank financial intermediaries can provide to the economy.

“While there are a variety of funding sources available to finance the EU economy, it seems to overly rely on financing intermediated through banks.”
— – European Commission CMU Staff Working Document

On 30 September 2015, the Commission adopted an action plan setting out key measures to achieve a true single market for capital in Europe. The action plan was preceded by a call to action, asking for opinions on the measures needed to unlock investment in the EU and create a single market for capital provided the Commission with a wealth of feedback. More than 700 responses were received, among which was one from Nasdaq.

The American multinational financial services corporation has a large presence in Europe. In addition to the NASDAQ stock market in the US, the company owns and operates eight European stock exchanges. Nasdaq published a further report on the topic today, “Capital Markets Union: The Road to Sustainable Growth in Europe.”

“Like other industries, the capital markets are currently witnessing a remarkable wave of disruption and innovation, driven by new technologies. From crowdfunding to smarter smartphones and the blockchain, changes are afoot that hold the potential to revolutionize the way we think about and interact with the world of finance as businesses, investors and consumers.”
— – Nasdaq

The report states that Europe’s businesses cannot fully exploit these opportunities because they are over-reliant on bank financing and lack sufficient access to venture capital and the capital markets.

The proportion of European company finance that comes from banks is high, around 80 per cent according to Deutsche Bank Research, less than 20 per cent comes from investors. Figures from the US are the opposite. The Nasdaq states that Europeans also lack sufficient access to venture capital.

Data from KPMG and CB Insights show that Europe-based venture capital firms raised US$3.2 billion in 284 deals during the second quarter of 2015. By comparison, US-based venture capital firms raised US$19 billion in 1,180 deals, and Asian firms raised US$10.1 billion in 313 deals during the same period. The study also notes that Europe’s deal count was down from its four-year high of 357 in the first quarter of 2015.

Other data from Invest Europe show that European venture capital activity is down from its peak in 2006. During that year, firms raised €112 billion (about US$146 billion) and invested €71 billion (about $92 billion). In 2014, they raised €45 billion (about US$59 billion) and invested €42 billion (about US$55 billion).

Nasdaq’s stated view is that the concrete measures in the CMU Action Plan focus on making it easier for large institutions to invest more and extend their product and service offerings, rather than improving the capital markets themselves.

“The Action Plan should focus on increasing transparency, making the capital markets more accessible to smaller businesses, incentivizing long-term private investment in listed equities, encouraging the development and use of disruptive technology and ultimately creating jobs.”

• Nasdaq

Nasdaqs current Chief Executive Officer, Bob Greifeld, is a self confessed “big believer” in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial services industry: “Clearing houses are a wonderful invention, but if you have a public ledger that is trusted, you can evolve back to a bilateral (trading) world but proceed with instantaneous settlement. We currently settle at T+3. Why not settle in 5-10 minutes?”

Under Greifeld’s leadership the company has already started exploring how distributed ledger technology can be applied. At the end of 2015, Nasdaq launched blockchain-enabled digital ledger technology that will be used to expand and enhance the equity management capabilities offered by its Nasdaq Private Market platform.

The group recently announced a new project focused on streamlining the proxy voting process in the Estonia market via blockchain. If the project succeeds, it will be applied across the other Nasdaq markets.

“Blockchain and distributed ledger technology could offer an entirely different way of engaging in commerce and reinvent the way value and risk are shared between counterparties. There are potential applications in areas such as payments, trade finance, trading, clearing and settlement, physical property title transfers and more.”

• Nasdaq

“Changes are afoot that hold the potential to revolutionize the way we think about and interact with the world of finance as businesses, investors and consumers,” states the report, while cautioning that “more needs to be done within the scope of the CMU to explore the opportunities offered by this technology.”

An independent report by Systemic Risk Centre, co-hosted at the the London School of Economics and University College London, also states that a successful CMU must embrace disruptive technologies. The EU and national authorities must “alter existing regulatory structures if the CMU is to be achieved, encouraging disruptive technologies and allowing market forces to match savings to investment opportunities more efficiently.”

The CMU action plan states that creating a well-functioning and integrated CMU is a long-term project, the Commission will assess achievements and reassess priorities in 2017.