Well-functioning and integrated capital markets are essential to finance the economic recovery post-Covid 19. They are equally important when it comes to tackling structural economic challenges and addressing societal needs – for instance, facilitating the shift of the EU economy towards green and digital and supporting European firms competing on global markets. The September 2020 capital markets union action plan added further momentum towards the development of capital markets in the EU. In June 2021, the European Commission published a list of indicators to track the development of capital markets and the benefits they offer the EU economy. The list is supplemented by a so-called ‘staff working document’, which explains the indicators that will be used to monitor progress towards accomplishing the objectives of the CMU.

Structural change

It is still too soon since the legislative measures set out in the first CMU action plan in 2015 were enacted to give a clear idea of the evolution of the CMU indicators. However, a careful reading suggests that EU capital markets have undergone structural change. They are now better positioned to boost economic growth and facilitate the adjustment of the EU economy that is needed.

European firms gradually increased their use of capital market funding between 2015 and 2019. A major improvement is the fact that corporate bonds have become an established funding tool for some of the larger firms. This freed the lending capacity for SMEs at banks – which remain their principal source of funding. SMEs have increasingly also been able to rely on alternative sources of funding, albeit starting from a very low level. In particular, SME equity growth markets – venues specialised in trading SME stock – have started to expand in the EU, and the provision of venture capital has increased.

Although EU households on average have a high saving rate, they barely invest directly in equity and bond markets. In contrast, households’ participation in capital markets via intermediaries has increased to some extent, in particular in Member States where insurance corporations and pension funds have traditionally played an important role.

Home bias – the tendency for investors to primarily invest in domestic equities – in EU investors’ portfolios has been gradually declining since 2015, although it has remained at a rather high level. However, differences continue to prevail when it comes to how conducive national rules are to investment – and to cross-border investment in particular.

Key questions

Establishing good indicators will help answer some key questions: Are we are making sufficient progress towards a capital markets union, i.e. a truly integrated single market for capital, with no obstacles to capital flows between investors and companies across Member States? Do European companies have access to the funds they need to recover after Covid, and to grow and create jobs? Is Europe a good place for people to save, invest long-term and prepare for retirement? Are capital markets truly supporting the transition towards a green and digital Europe? Are European capital markets reinforcing the EU’s global competitiveness and open strategic autonomy?

Answers to these questions will help identify the areas where former policies may need to be adjusted or new measures put forward. This first edition of the CMU indicators shows that EU capital markets have broadly developed favourably since the first CMU action plan in 2015. And this is in spite of the short time that’s passed since the implementation of the specific CMU legislative measures, as well as the structural rupture caused by the UK’s departure from the EU. We should see further progress towards the CMU objectives with future versions of the CMU indicators. Disentangling the impact of the CMU measures from the impact of other factors will, however, remain a challenge.

Read more about the CMU indicators and the capital markets union