CMU, competitiveness to take centre stage in next economic policy cycle

This article is part of our special report Key unfinished files EU Parliament inherits in the next term.

In March this year, eurozone finance ministers demanded the upcoming European Commission revive the bloc’s decade-old Capital Markets Union (CMU), mainly by reducing barriers for institutional and retail investors, listing, real-time access to market data, and securitisation investment.

Similar requests were made by EU leaders in April, who placed CMU objectives at the heart of future European competitiveness plans. This underpins a growing consensus that private investment flows will be crucial in meeting the bloc’s funding needs—including for decarbonising industries and building a thriving digital economy—estimated at around €600 billion per year.

Thus, CMU discussions will take centre stage during the next cycle and likely revolve around boosting investment into riskier and younger companies, streamlining insolvency rules and corporate taxation systems, centralising market supervision, and easing capital requirements for certain asset classes, including securitised products.

These will be key as policymakers once again face dilemmas on whether to set out longer-term EU public funding programmes like the €723.8bn Recovery and Resilience Facility (RRF) or focus exclusively on creating a pan-European investment market to inject life into the bloc’s dormant economic growth trajectory.

Meanwhile, more specific policy files also await further legislative steps.

Digital Euro

The Commission proposed the Digital Euro in June 2023, after two years of consultations and assessments alongside the European Central Bank, in the wake of increased third-country central bank digital currencies (CBDC) and cryptocurrencies.

According to its proponents, these contenders challenge the euro’s role and undermine the EU’s monetary sovereignty.

It also aims to support citizens’ payment habits, boost financial inclusion, and re-adjust the “desirable balance between central bank money and private digital means of payment”.

Backed by the ECB rather than by commercial banks and perceived as safer, financial firms and banks fear it might lead to citizens withdrawing their savings en masse.

The European Parliament is also worried about the digital euro’s impact on the financial sector and is sceptical about the premise for its introduction.

If Parliament and Council endorse the proposal, the ECB must decide whether to issue it. According to the EU website, the digital euro may take a few years to issue.

Screening of foreign direct investments (FDI)

The Commission proposed this in January 2024 as one of five core initiatives to boost its 2023 Economic Security Strategy, which is part of the broader geopolitical shift to “de-risk” from China.

It updates a 2019 framework that responded to concerns about foreign investors seeking to acquire control of EU firms that provide critical technologies, infrastructure, or inputs or hold sensitive information and whose activities are essential for security or public order at the EU level.

The new provisions increase the national screening mechanism and reporting and boost the exchange of information between the Commission and national authorities when potential cross-border risks are identified.

Businesses—including US firms—are concerned that it could increase scrutiny of low-risk transactions, raise EU investment barriers, and lower its attractiveness.

The Parliament has tentatively indicated a rapporteur for the file – Margarida Marques (S&D, Portugal)- but negotiations have yet to start with Parliament or the Council.

EU Retail Investment Strategy (RIS)

Announced in May 2023, the directive modifies multiple aspects of existing legislation—including the Markets in Financial Instruments Directive, the Alternative Fund Managers Directive, and the Insurance Distribution Directive—to allow for the broader involvement of retail investors in European capital markets.

It came as part of the more comprehensive, long-standing Capital Markets Union framework, first announced in 2015.

The Parliament adopted its position in March 2024 and is expected to start trilogues with the Council in the next legislative term, but a final text is not expected before 2025.

One of the main issues is a ban on the payment of sales commissions (‘inducements’) from product manufacturers to retail distributors, even for non-advised sales (“execution-only”).

The Commission proposed this, requiring investment firms and life insurers to quantify and justify the costs of their products to their expected performance (‘value for money’).

The ban was scrapped from the Parliament’s final compromise text, prompting criticism from consumer-finance NGOs Finance Watch, Better Finance and the European Consumer Organisation (BEUC), who urged legislators to strengthen and safeguard the value-for-money concept.

Reform of the Crisis Management and Deposit Insurance (CMDI)

Proposed in April 2023, it aims to reform the Banking Union and bank resolution framework, set up in reaction to the 2008 financial crisis and the 2012 EU sovereign debt crisis.

The post-financial crisis EU framework built up banks’ internal loss-absorption capacity by increasing contributions from the sector and the banks’ investors through a hierarchy of loss-taking, at the basis of which there are protected – excluded – depositors (those with funds under €100,000).

To trigger the resolution process, it must be established that normal insolvency proceedings would harm the general public interest, as the bank’s failure, sale, or closure would be detrimental to the broader financial stability of the system.

The resolution framework ensures that the bank is resolved orderly, ensuring the continuity of critical functions, protecting depositors and restoring the viability of parts or all of the bank.

The Commission noted that in the first years of the bank resolution rules,  “implementing the CMDI framework has revealed difficulties in managing the failure of smaller/medium-sized banks, in particular, where there is an implied allocation of losses to depositors, which could affect depositors’ confidence and financial stability.

The reform would amend the early intervention procedure and the “public interest” definitions while encouraging the use of funding from national deposit guarantee schemes when a bank enters the resolution process and complementing the banks’ internal loss absorption capacity.

The Parliament adopted its position at the end of April, while the Council has yet to reach a general position before trilogues can start.

[Edited by Zoran Radosavljevic/Alice Taylor]

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