Eurogroup Report – Future of Capital Markets Union (CMU)

?Eurogroup Report Summary

The Eurogroup Report on the Future of the Capital Markets Union (CMU), published on March 11, 2024 outlines a comprehensive framework to enhance the depth, efficiency, and resilience of European capital markets. This is seen as vital for boosting EU competitiveness, innovation, and sustainable growth. ??The Eurogroup is the grouping of Ministers of Finance from countries using the Euro currency. The Eurogroup exercises political control over the Euro currency and related aspects of EU monetary union, including the Stability and Growth Pact.?.

Importance of Capital Markets Union (CMU)

The CMU aims to deepen and integrate European capital markets to enhance the EU’s global competitiveness and innovation capabilities. Capital markets play a pivotal role in boosting economic resilience, enabling efficient allocation of capital, and fostering cross-border private risk-sharing. The Eurogroup stresses that despite recent progress, European capital markets remain underdeveloped compared to their global counterparts, necessitating urgent reforms to address fragmentation and reduce barriers.

?Strategic Challenges and Priorities

?Europe risks falling behind globally in terms of growth, innovation, and competitiveness. The current reliance on bank funding for businesses and lack of deep capital markets, particularly for start-ups and scale-ups, forces many of the EU’s most innovative companies to seek funding abroad. The Eurogroup identifies three key areas of action for the CMU: architecture, business, and citizens.

Building a Competitive and Resilient Market Structure

To develop more integrated capital markets, the Eurogroup emphasizes the need for a streamlined and agile regulatory framework that fosters cross-border risk-sharing and enhances financial stability. Key measures in this area include:

• Developing the securitization market: The Eurogroup calls on the European Commission to assess factors hindering the development of a robust securitization market. This includes revisiting the prudential treatment of securitization for banks and insurance companies and addressing reporting and due diligence requirements. The aim is to allow risks to be efficiently transferred to parties best equipped to manage them.
• Supervisory convergence: To strengthen financial integration, reduce compliance costs, and enhance the attractiveness of EU capital markets, the Eurogroup advocates for further convergence in supervisory practices across the EU. This would involve refining the common rulebook and exploring ways to enhance the European Supervisory Authorities’ powers.
• Reducing regulatory burden: A key objective is to reassess the EU’s financial market regulatory framework to lower transaction costs and reduce burdens, especially for smaller market participants. This would improve the EU’s competitiveness as a financial hub while maintaining financial stability.
• Corporate insolvency frameworks: There is a need for convergence in insolvency frameworks across the EU, particularly regarding the ranking of claims and insolvency triggers. This would facilitate cross-border investment and capital market development.
• Harmonizing accounting frameworks: Enhancing cross-border comparability of financial information, particularly for small and medium-sized enterprises (SMEs), would improve investment flows into non-listed firms. The development of a voluntary International Financial Reporting Standards (IFRS)-light regime for SMEs is proposed.
• Market infrastructure and listing requirements: Integrating and harmonizing market infrastructure across European exchanges would reduce costs and make it easier for companies, especially SMEs, to raise capital through equity and bond financing.

Business: Enhancing Access to Private Funding

The Eurogroup underscores the importance of making market-based funding more accessible to EU businesses, particularly in the sustainable and digital sectors. Several actions are proposed:

• Institutional investment in venture capital: The Eurogroup encourages the European Commission to explore ways to improve institutional and retail investment in venture capital, particularly for growth-stage and scale-up businesses. The European Tech Champion Initiative (ETCI) serves as a model for joint public-private investment structures that can help mid-sized companies access capital.
• Sustainable finance: Scaling up the EU’s sustainable finance framework is vital for supporting businesses in their green transition. The Eurogroup urges the European Commission to reduce administrative burdens and support the uptake of sustainable finance tools by businesses and investors.

Increasing Retail Participation in Capital Markets

The Eurogroup emphasizes the need to create better opportunities for EU citizens to accumulate wealth, invest productively, and secure their financial future through capital markets. The following measures are proposed:

• Attractive and consumer-centric investment products: To facilitate retail participation, the Eurogroup proposes developing easy-to-use, low-cost investment products that are accessible through secure digital interfaces. Member States are encouraged to make their personal income tax systems more supportive of capital market investments, particularly for long-term savings.
• Occupational and personal pension schemes: To address the EU’s aging population and ensure complementary retirement income, the Eurogroup calls for expanding access to occupational and personal pension schemes. The European Commission is invited to review the pan-European Pension Product (PEPP) to offer citizens attractive pension investment options.
• Financial literacy: To foster a stronger investor culture, the Eurogroup urges Member States to improve financial literacy among citizens and SMEs. Targeted initiatives should encourage long-term wealth creation through investing in capital markets.

?Legislative Measures and Coordination

The Eurogroup calls for a coordinated approach between Member States and EU institutions to ensure swift implementation of these measures. The European Commission is invited to lead the development of legislative proposals and conduct thorough impact assessments, considering cost-benefit analyses and stakeholder consultations.

The report stresses the importance of building a genuine single market for capital, which will require close cooperation between EU institutions, Member States, and industry stakeholders. The success of the CMU will hinge on continuous monitoring and regular performance reviews at both national and EU levels. The Eurogroup will play an active role in overseeing progress, with the first reviews expected to take place starting in 2025.

Pension Systems and Capital Markets

As part of the broader effort to strengthen the Capital Markets Union (CMU), the document highlights the importance of improving citizens' access to financial markets to secure complementary retirement income streams. This involves increasing participation in occupational and personal pension schemes. The Eurogroup outlines several measures aimed at enhancing the pension landscape in Europe:

-??????? Promoting Long-Term Savings and Pensions: The Eurogroup stresses the importance of long-term savings products as complementary income sources, particularly for Europe’s aging population. The development of these products, including occupational and personal pension schemes, will ensure that citizens can secure their retirement income. The European Commission is encouraged to review and further develop the Pan-European Pension Product (PEPP), a voluntary personal pension scheme designed to be portable across EU Member States. This would provide more attractive options for citizens, encouraging productive investments of pension savings and reducing reliance on public pension systems.

• Occupational Pension Market Improvements: Member States are invited to evaluate the availability of occupational pension products and share best practices regarding how to improve the enrolment of citizens in these plans. The aim is to expand coverage and ensure that more citizens have access to these retirement savings programs. The European Commission will provide insights into best practices to guide these efforts and develop mechanisms like pension tracking systems, allowing individuals to view and assess their future retirement income prospects.
• Developing a Pension Dashboard: To ensure transparency and monitor pension coverage across Europe, the Eurogroup invites the European Commission to collaborate with the European Insurance and Occupational Pensions Authority (EIOPA) and other Member States to create a pension dashboard. This dashboard will track the evolution of pension systems and provide key data, supporting policy improvements and enhancing citizens' confidence in their future retirement income.

Retail Participation in Pension and Investment Markets

The document places a strong emphasis on facilitating citizens’ participation in financial markets, including pension investments. Measures include:

• Retail Investor Participation: The Eurogroup advocates for the creation of an attractive, consumer-centric investment environment. This includes the use of secure digital interfaces developed by the financial industry to allow citizens easy access to a wide array of investment opportunities. Tax incentives may be offered by Member States to encourage retail investments in long-term savings products, including those linked to pensions.
• Financial Literacy and Investor Culture: A core focus of the CMU is to promote financial literacy among EU citizens to foster a culture of investment. Member States are invited to launch initiatives aimed at educating both individuals and SMEs about the benefits of market-based investments, especially in the context of long-term wealth accumulation for retirement. The Eurogroup emphasizes that this shift towards an investor/shareholder culture will improve retail participation in financial markets, including pension investment products.

Cross-Border Investment Products

The development of cross-border pension and investment products is seen as key to facilitating a more integrated capital market for citizens across Europe. The document outlines:

• Cross-Border Pension Products: To enhance access to simple and cost-effective cross-border savings products, the European Commission is invited to assess the potential for new frameworks that allow citizens to invest in standardized, market-based products across the EU. These products would be especially beneficial for younger citizens, offering them early exposure to capital markets with automatic investment mechanisms and diversified allocations. This would promote consistent retirement savings across borders, harmonizing pension systems within the EU.
• Harmonizing Shareholder Rights: The Eurogroup also calls for a review of the EU Shareholder Rights Directive to ensure that shareholders, including those investing through pension funds, can exercise their ownership rights across borders without facing undue obstacles. This harmonization would allow retail investors to participate more fully in the governance of the companies in which they are invested, enhancing pension fund transparency and accountability.

?The Role of the Industry

The Eurogroup’s statement on the future of the Capital Markets Union highlights the urgency of developing a more integrated, competitive, and resilient European capital market. With coordinated efforts, the CMU can unlock substantial growth potential, enhance innovation, and improve financial security for businesses and citizens across the EU. This ambitious agenda, if successfully implemented, will position Europe as a global leader in capital markets, innovation, and sustainable growth.

While EU institutions and Member States bear the responsibility for creating the enabling conditions for the CMU, the EU-based financial industry has a crucial role to play. The Eurogroup invites the industry to fully utilize the opportunities created by regulatory changes and anticipate future reforms to ensure a smooth implementation of the CMU measures.

The Eurogroup report is deeply intertwined with the development of pension systems and workplace retirement savings programs. By creating more attractive and accessible market-based savings products, improving financial literacy, and fostering an investor culture, the CMU seeks to enhance the financial security of EU citizens, particularly in their retirement years.

The successful integration of pension systems into the broader capital market framework will help ensure sustainable economic growth and secure complementary income streams for an aging population. This vision aligns with the EU’s long-term goals of fostering innovation, boosting competitiveness, and supporting the green and digital transitions through robust capital markets.

?Pensions & Capital Markets

The integration of pensions and workplace retirement savings programs into the broader objectives of the CMU is seen as a necessary step to enhance financial security for EU citizens. The emphasis is on creating a complementary pension system that relies on both public and private sources of retirement income, underpinned by robust investment opportunities and regulatory oversight. By increasing access to market-based savings and investment products, the CMU aims to:

• Provide citizens with better returns on their pension savings through diversified market investments.
• Ensure the sustainability of pension systems by reducing the reliance on public pensions and encouraging greater private sector participation in retirement savings.
• Enhance the resilience of the European pension landscape by developing a pan-European system that allows cross-border investments and harmonized regulatory frameworks.

As part of the broader effort to strengthen the Capital Markets Union (CMU), the document highlights the importance of improving citizens' access to financial markets to secure complementary retirement income streams. This involves increasing participation in occupational and personal pension schemes. The Eurogroup outlines several measures aimed at enhancing the pension landscape in Europe:

• Promoting Long-Term Savings and Pensions: The Eurogroup stresses the importance of long-term savings products as complementary income sources, particularly for Europe’s aging population. The development of these products, including occupational and personal pension schemes, will ensure that citizens can secure their retirement income. The European Commission is encouraged to review and further develop the Pan-European Pension Product (PEPP), a voluntary personal pension scheme designed to be portable across EU Member States. This would provide more attractive options for citizens, encouraging productive investments of pension savings and reducing reliance on public pension systems.
• Occupational Pension Market Improvements: Member States are invited to evaluate the availability of occupational pension products and share best practices regarding how to improve the enrolment of citizens in these plans. The aim is to expand coverage and ensure that more citizens have access to these retirement savings programs. The European Commission will provide insights into best practices to guide these efforts and develop mechanisms like pension tracking systems, allowing individuals to view and assess their future retirement income prospects.
• Developing a Pension Dashboard: To ensure transparency and monitor pension coverage across Europe, the Eurogroup invites the European Commission to collaborate with the European Insurance and Occupational Pensions Authority (EIOPA) and other Member States to create a pension dashboard. This dashboard will track the evolution of pension systems and provide key data, supporting policy improvements and enhancing citizens' confidence in their future retirement income.

?Retail Investment & Pensions

The document places a strong emphasis on facilitating citizens’ participation in financial markets, including pension investments. Measures include:

• Retail Investor Participation: The Eurogroup advocates for the creation of an attractive, consumer-centric investment environment. This includes the use of secure digital interfaces developed by the financial industry to allow citizens easy access to a wide array of investment opportunities. Tax incentives may be offered by Member States to encourage retail investments in long-term savings products, including those linked to pensions.
• Financial Literacy and Investor Culture: A core focus of the CMU is to promote financial literacy among EU citizens to foster a culture of investment. Member States are invited to launch initiatives aimed at educating both individuals and SMEs about the benefits of market-based investments, especially in the context of long-term wealth accumulation for retirement. The Eurogroup emphasizes that this shift towards an investor/shareholder culture will improve retail participation in financial markets, including pension investment products.

?Cross-Border Investment Products

The development of cross-border pension and investment products is seen as key to facilitating a more integrated capital market for citizens across Europe. The document outlines:

• Cross-Border Pension Products: To enhance access to simple and cost-effective cross-border savings products, the European Commission is invited to assess the potential for new frameworks that allow citizens to invest in standardized, market-based products across the EU. These products would be especially beneficial for younger citizens, offering them early exposure to capital markets with automatic investment mechanisms and diversified allocations. This would promote consistent retirement savings across borders, harmonizing pension systems within the EU.
• Harmonizing Shareholder Rights: The Eurogroup also calls for a review of the EU Shareholder Rights Directive to ensure that shareholders, including those investing through pension funds, can exercise their ownership rights across borders without facing undue obstacles. This harmonization would allow retail investors to participate more fully in the governance of the companies in which they are invested, enhancing pension fund transparency and accountability.

?Pension System Integration into CMU

The integration of pensions and workplace retirement savings programs into the broader objectives of the CMU is seen as a necessary step to enhance financial security for EU citizens. The emphasis is on creating a complementary pension system that relies on both public and private sources of retirement income, underpinned by robust investment opportunities and regulatory oversight. By increasing access to market-based savings and investment products, the CMU aims to:

• Provide citizens with better returns on their pension savings through diversified market investments.
• Ensure the sustainability of pension systems by reducing the reliance on public pensions and encouraging greater private sector participation in retirement savings.
• Enhance the resilience of the European pension landscape by developing a pan-European system that allows cross-border investments and harmonized regulatory frameworks.

?Key Takeaways

• ?European capital markets are underdeveloped, with high fragmentation and a lack of deep markets for risk capital, especially for startups and scale-ups.
• The banking sector dominates corporate funding, but there is an urgent need for market-based funding to complement it, especially for long-term growth.
• Significant progress has been made through Capital Markets Union (CMU) action plans, but the full potential remains untapped.
• Cross-border capital flows and risk-sharing mechanisms are insufficient, hampered by regulatory barriers and inconsistencies across the EU.
• SMEs struggle to access capital, limiting their growth potential in the EU compared to global peers.
• There is an increasing emphasis on sustainable finance and the green transition, but the uptake of these tools by businesses and investors is slow due to administrative and regulatory hurdles.
• Retail investor participation in capital markets is low, necessitating more attractive, consumer-centric investment products and improved financial literacy across the EU.
• Pensions and long-term savings products are critical for providing complementary income streams for Europe’s aging population, and there is a push to develop these products further.

Future Agenda

• Enhanced regulatory convergence across the EU will lead to more streamlined and efficient capital markets, reducing compliance costs and boosting cross-border investment.
• The development of a robust securitization market in the EU will improve capital allocation, transferring risks more efficiently and making capital markets more attractive for both businesses and investors.
• SME access to equity financing will improve through harmonized listing requirements and targeted incentives, boosting their growth within the EU.
• Sustainable finance frameworks will be scaled up, with businesses and investors increasingly adopting green financing tools as administrative burdens are eased.
• Retail participation in capital markets will increase as Member States introduce tax incentives for long-term investments and pension products, and financial literacy initiatives are expanded.

Pan-European pension products (like PEPP) will become more attractive, providing citizens with better options for their retirement savings, and improving overall financial security.

• The integration of national pension systems into the CMU will increase cross-border investment opportunities and support the creation of a more resilient European pension landscape.
• A shift towards digital, secure investment platforms will make it easier for citizens to invest, enhancing the attractiveness and accessibility of capital markets.
• Insolvency frameworks and shareholder rights will be harmonized across borders, improving investor confidence and fostering a more robust shareholder culture.

?Conclusion

The Eurogroup's report on the future of the Capital Markets Union is deeply intertwined with the development of pension systems and workplace retirement savings programs. By creating more attractive and accessible market-based savings products, improving financial literacy, and fostering an investor culture, the CMU seeks to enhance the financial security of EU citizens, particularly in their retirement years. ??

The successful integration of pension systems into the broader capital market framework will help ensure sustainable economic growth and secure complementary income streams for an aging population. This vision aligns with the EU’s long-term goals of fostering innovation, boosting competitiveness, and supporting the green and digital transitions through robust capital markets