European Central Bank President Christine Lagarde has called for the creation of a European Securities and Exchange Commission (SEC) and a unified stock exchange to help raise capital to tackle the region’s “de-globalization, demographics and de-carbonization.”
Speaking at the European Banking Congress in Frankfurt, Lagarde emphasized the need for a “generational effort” and “massive investment” to address these challenges, comparing Europe’s investment needs to bond issuance at the end of the 19th century.
She noted that the transition to renewable energy would require an additional investment of €620 billion per year by 2030, while the digital transformation would require an additional investment of €125 billion per year.
Although the EU has been working on a “capital markets union” for more than a decade, Lagarde admitted that “so far we have not been able to make progress.” She blamed this failure on the fragmentation of Europe’s financial markets, which are far smaller and less liquid than those of the United States.
Lagarde proposed a three-pronged approach to address these challenges:
Create a European Securities and Exchange Commission: The European Securities and Exchange Commission would replace the patchwork of national market regulators and provide a broader mandate, including direct supervision.
Create a unified stock exchange: A unified stock exchange would increase market depth and liquidity, making it easier for companies to raise capital.
Expand the securitization market: Securitization, which involves packaging and selling loans to investors, could provide banks with more funds to lend to companies.
Lagarde acknowledged that governments alone cannot provide enough financing and that private sector involvement is crucial. She urged European businesses to demonstrate their commitment to a unified capital market and encouraged the operators of the European stock exchanges to join forces to create a unified tape.
A study by think tank New Financial has shown that a unified European capital market could lead to an additional 4,800 start-ups and raise an additional €535 billion in funding annually.
In addressing the funding shortfall for European businesses, Lagarde emphasized that an ECB survey found that nearly 40 percent of SMEs said a lack of investor interest was a “very important obstacle” to raising capital for green investments.
Commercial bank executives at the conference echoed Lagarde’s call for greater capital market harmonization. Manfred Knof, chief executive of Commerzbank, stressed the need to lift restrictions on securitization markets, while Christian Sewing, chief executive of Deutsche Bank, called for simplified European securitization rules.
With the EU’s €800 billion recovery fund set to expire in 2025 and debt-laden governments struggling to provide adequate financing, a harmonized European capital market could play a key role in addressing Europe’s pressing challenges and ensuring its future prosperity.