Capital market finance remains neglected in Europe
Commentary by Karel Lannoo, Chief Executive Officer, Centre for European Policy Studies (CEPS)
Three years after the EU’s capital markets union (CMU) announcement, little has changed in the structure of the financing of European corporations: bank financing remains the predominant share of external finance of firms, with 67%. In fact, its share has even increased.
Very few firms see a shift in their external financing mix towards capital markets. According to the latest Survey on Investment and Investment Finance of the European Investment Bank (EIBIS), only 2% of firms hope to increase the importance of equity. Bond issuance is planned as a future source of capital by only 4% of firms.
The EIBIS survey is probably one of the most comprehensive reports on the financial needs of European firms, based on an annual survey of more than 12,500 firms, SMEs and corporates, in the EU 28. It assesses the investment activities and capital stock of firms, and sees the lack of skilled staff, and business and labour market regulations as major barriers to investment.
Apart from bank financing, the second most important course of external finance is leasing, with 23%.
Capital markets, both equity and bond issues, are rarely reported by firms in the survey, making up on average only 0.4% and 2% of external finance.
Even if a more balanced structure of external financing would be desirable from a financial stability and market efficiency perspective, it seems that a more radical and pronounced approach is needed to achieve a deeper capital market in Europe.
The CMU initiative has so far only generated two measures: to stimulate securitisation and to facilitate IPOs. More far-reaching initiatives should first enhance awareness of different forms of financing with entrepreneurs. Corporate tax systems should be radically modified to reduce the debt-to-equity bias and abolish double taxation of dividend income in the EU.
On the demand side, households should be stimulated to have a more balanced asset allocation, away from the pre-dominance of deposits in Europe. Institutional investors' asset allocation varies widely, but is on average over-exposed to bonds (see OECD’s Global Pension Fund Statistics).
Pension funds portfolios in Germany, for example, have only 3% in equity. Then they complain that the ECB’s quantitative easing policy is the source of their low returns.
The deleveraging of banks in Europe since the financial crisis has not been replaced by more market financing. This should be a wake-up call for policymakers to reassess the regulatory framework, and create a real capital markets climate.