Christian Sewing and Werner Hoyer | Capital Markets Union key to a greener Europe | Business

J Jean Monet, an architect of the European Union, once said that European unity “will be forged in crises, and will be the sum of the solutions adopted for these crises”.

The last decade and a half has provided further confirmation of Monnet’s prediction. Contrary to the predictions of many leading economists, the EU’s Economic and Monetary Union survived the euro debt crisis and is still doing well, thanks to the European Stability Mechanism. The Juncker Plan helped put Europe’s economy back on track and Brexit, far from breaking up the EU, brought it closer together.

The EU is once again proving its worth in the COVID-19 pandemic. The outstanding researchers at BioNTech developed a cutting-edge vaccine in record time, and joint procurement allowed the vaccines to be distributed equitably and efficiently – despite some initial difficulties – ensuring relatively high vaccination rates in many member states of the EU. The recovery plan and the European Guarantee Fund now help economically weaker states and regions to cope with the consequences of the pandemic.

Since 2000, the EU has repeatedly demonstrated its ability to provide solutions and show solidarity. But the endless search for quick solutions to acute crises has a major drawback: the completion of the European single market has fallen to the bottom of the political agenda. These EU-level issues played no role in Germany’s election campaign this year, even though a stronger single market is crucial to deal with increased economic competition from the US and China.

Europe is simply not realizing its potential. The EU already has a single market for goods, but not a fully functioning market for services, especially in an otherwise booming digital economy. If a Silicon Valley startup develops a good product, it has immediate access to a huge domestic market and can grow to the point where it can sustain itself globally. But in Europe, that same start-up would have to spend its early years dealing with so many foreign tax lawyers and domestic regulators that international expansion would hardly seem worth it.

Europe also lacks a capital markets union and a genuine banking union; and because there are significant regulatory differences between EU countries, European shareholders and corporate bond investors avoid offerings beyond their own borders, potentially foregoing investment opportunities more attractive. This highlights the need to complete the banking union, which includes common banking supervision, a bank settlement mechanism and a shared deposit guarantee.

European governments must also overcome their skepticism towards securitisation, which is a key element of the Capital Markets Union. It is true that group loans triggered the financial crisis of 2008; but that’s only because no one was watching them. With better regulation and oversight, securitization can be a powerful tool for banks to unlock additional capital for new business loans and to finance investments in green technologies.

The European Commission has done well to develop an ambitious strategy for a green and digital transformation of the EU economy, sending an important signal to the rest of the world. But the absence of a competitive capital market jeopardizes Europe’s ambitious climate goals. Massive investment is needed this decade to transform energy, transport, large swathes of industry and millions of properties, and to protect Europeans from the devastating effects of climate change, which have been fully manifested the past two summers.

These goals will only be possible if governments work with public and private sector banks to attract private investors across borders. Europe needs to fill a climate action funding gap of 350 billion euros ($401 billion) a year for at least the next 10 years. We may have gotten used to governments and central banks providing huge sums of money to support the economy, but that won’t last forever. Interest rates will not stay so low in the long term, sovereign debt will reach its limits and rising taxes will not be enough to fund this once-in-a-century transformation.

But the EU already has the tool it needs to bridge the gap: all it needs to do is create a genuine banking and capital markets union. We can see what is achievable through common rules if we are looking at sustainable funding. With the issuance of the first green bond, the European Investment Bank, the EIB, has given an important boost to the green bond and sustainability bond market. This has resulted in a uniform market understanding of what constitutes a green or sustainable bond.

Moreover, with the EU taxonomy, there are now transparent criteria to determine which economic activities are already green or can develop in this direction. Investors have a clear set of rules to use as a guide for sustainable financing. This transparency at EU level represents a huge step forward, turning a once ridiculed idea into a 2 trillion euro market.

With a genuine Capital Markets Union, the EU would expand financing opportunities for businesses and attract capital from around the world, and the euro could become truly competitive against the dollar. Currently, European businesses are overly reliant on loans, with private sector banks like Deutsche Bank providing 80% of business financing. While banks will make an essential contribution to the green and digital transformation of the private sector, they cannot support the massive financing needs alone.

While 60% of US companies obtain capital market financing, only 20% of EU companies do. If more European companies could do this, huge sums of investment would be freed up. European start-ups would not have to seek American investors during their growth phase. And European frontrunners like BioNTech – which received seed funding from the EIB – wouldn’t need to turn to the Nasdaq when their financing needs hit hundreds of millions of dollars.

If Monnet’s belief about the EU holds true, the climate crisis will be the next step towards deeper integration. Europe’s green and digital transformation can only succeed if it goes hand in hand with the completion of the single market, including a banking and capital markets union.

Christian Sewing is CEO of Deutsche Bank. Werner Hoyer is President of the European Investment Bank.

© Syndicate Project 2021

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