Judging by its strong, dramatic language, Mario Draghi’s big report on European competitiveness was clearly intended to get EU decision-makers’ attention. Rather than trying to sugarcoat the pill, he warns that Europe is falling ever further behind the United States. Not only has it largely missed the digital revolution, but it is about to miss the AI revolution, too. Not one European technology firm can rival the likes of Apple or Microsoft.
Moreover, Draghi notes that productivity growth across the continent is lagging behind that of the US, confronting the European Union with an “existential challenge.” If it does not “radically change” its ways, it “will have lost its reason for being.” Even as wake-up calls go, this was a loud one -- the kind that some alarm clocks make if you ignore their first polite nudges.
Draghi’s conclusions will be music to the ears of the dwindling band of Brexiteers in the United Kingdom, because they have always peddled European sclerosis. In making the case for “Leave,” they argued that the UK was bound to a dead donkey and needed to break free.
But Draghi is no Euroskeptic or enthusiast for subsidiarity, and most of his recommendations would require “more Europe” in the form of coordinated policies and a huge boost to publicly funded investment at the EU level. He argues that an additional 800 billion euros ($892 billion) of investment is urgently needed to address the productivity problem and turbocharge the transition to a green economy. Predictably, this proposal has met with enthusiasm in Rome, cautious acceptance in Paris, and howls of protest in Berlin.
But in specific chapters that have attracted less attention, Draghi also addresses the EU’s financial and regulatory structure. He thinks Europe is too dependent on bank finance, and he is clearly right. New growth companies (of which there are far fewer than in the US) tend to be funded by US venture capitalists, and 30 percent of euro-unicorns (private start-ups valued at $1 billion or more) have moved their headquarters across the Atlantic as soon as the market has recognized their potential.
The primary reason for this sad state of affairs is that European capital markets remain fragmented. The plan to fashion a capital-markets union has made little headway ever since its launch in 2015 (by Jonathan Hill, then the UK’s commissioner in Brussels). Part of the problem is political. EU politicians, especially left-leaning members of the European Parliament, remain suspicious of securitization (a key pillar of the plan), because they continue to associate the concept with the US subprime mortgage crisis.
In any case, Draghi gives the initiative another push, recognizing that it is the only way to address European companies’ excessive reliance on bank finance. But he also views the absence of a powerful securities regulator as another big part of the problem.
It is not a new thought. Around 15 years ago, Jacques de Larosiere, who formerly served as president of the European Bank for Reconstruction and Development, recommended a European Securities and Exchange Commission in his post-2008 report on financial regulation. Instead, the EU created a halfway house in the form of the European Securities and Markets Authority.
While ESMA does useful work and has established itself as a key part of the EU financial architecture, it falls well short of being a European counterpart to America’s SEC. For example, it directly oversees credit-ratings agencies and a few other pan-European entities, but not local stock exchanges. Thus, capital-raising methodologies vary from country to country, creating a serious handicap for aspiring entrepreneurs and most companies.
Even if the campaign to create a more powerful agency is not new, it has been strengthening lately. European Central Bank President Christine Lagarde has made the same recommendation, and its inclusion in Draghi’s report puts it firmly on the agenda of the new Commission under Ursula von der Leyen.
Yet even with such powerful backing, success is not assured. To create a plenipotentiary body with the full suite of powers that have been proposed would require a treaty change, and the European Council has avoided such moves ever since the Treaty of Lisbon in 2009. Many European leaders fear that revising the EU’s foundational treaties could open questions they would rather not address. Some countries inevitably object to granting new powers to a centralized authority, and some would have to conduct a referendum to ratify it, creating opportunities for subversive Brexit-like forces to emerge. Moreover, most referendums on European integration have failed the first time.
Nonetheless, quite a lot could be achieved without a new or revised treaty. One of Draghi’s key recommendations is to make ESMA’s governance structure more like the ECB’s. Its council is dominated by representatives from member-state regulators, whereas the ECB’s directorate includes six people who are required to act in the European interest, not that of their home country.
It is also possible to put European stock exchanges and clearing systems under ESMA’s purview. But this would not be a trivial move. Would the French government allow the Bourse de Paris to be overseen by a European regulator, even one headquartered in Paris? The German government is openly hostile to the idea of a cross-border merger of UniCredit and Commerzbank, even though the latter is in sore need of a new direction. Would it allow the Deutsche Börse to be regulated from Paris?
If European Council members really want a capital-markets union, they will need to set national considerations aside and swallow their pride. The coming months will show us how committed they are to restoring European competitiveness in a world where they are falling further behind.
Howard Davies
Howard Davies, a former deputy governor of the Bank of England, is chairman of NatWest Group. The views expressed here are the writer’s own. -- Ed.
(Project Syndicate)
