In 1957, when the Treaty of Rome was signed and the European Economic Community was established, it was the first milestone in the long path toward free circulation of goods, capital, services and people among European countries.
Fast forward nearly 60 years: the European capital market is still segmented into 28 different markets. Many of them are quite underdeveloped, to the point that one of the European Commission’s priorities in 2015 is to mobilize capital with a project dubbed Capital Market Union, or CMU.
Within the European Union (EU) capital does not circulate well. Although the United States and Europe have a comparable population size, Europe’s equity market is less than half the size of the United States’; its debt market is less than a third the size.
Businesses’ main source of funding remains bank loans, which means that small and medium-size enterprises or new start-ups often don’t have access to credit. SMEs get five times more credit from capital markets in the United States than in Europe, says the European Commission (EC). With a more developed venture capital market, European firms could have raised an additional €90 billion ($101 billion) over the past five years, it adds.
“Sometimes the CMU as a concept sounds a bit abstract. Well, actually, it isn’t,” said EU commissioner Jonathan Hill at the plan’s launch at the end of September. “What it is about, at its most simplest, is creating the right conditions for more funding to flow from Europe’s savers to Europe’s businesses. It is very practical. It is about unlocking those savings and putting them to work to support growth.”
The plan consists of a myriad of different measures expressed in 20 action points aimed at sending capital where it is needed the most, with a precise implementation calendar. Some of the points are general and vague, but there are a few concrete ones (see box). The EC intends to recover in the next four years at least part of what was not done in the past 60 years.
“In the background there is an Italy that works well and there is a good group of companies that deserve better access to the capital markets,” says Carlo Favero, director of the finance department at Bocconi University in Milan.
In the past two years, while the S&P 500 gained around 20%, the FTSE Italia STAR Index of medium-size companies listed on the Milan stock market rose nearly 60%, outperforming firms on the main board. The poster child of the group was DeLclima, the air conditioning company that was acquired in August by Mitsubishi Electric for €664 million ($747 million). Elsewhere in Europe there is a myriad of small and medium-size firms waiting for nonbanking loans, said Favero, and this is why the Commission’s plan “is a good idea, and will be a useful one.”