To realise a genuine Capital Market Union (CMU) in Europe through a top-down approach requires the 27 member states to agree to a unified legal, regulatory, and financial framework. This is no mean feat.
The project has so far taken the best part of a decade and progress has been slow, and many involved are growing impatient. But getting member states on board was always going to take some time, far longer than the eight years it has taken so far. Sources agree that failure to do so is a big part of the reason there has been little in the way of tangible progress.
Given the enormity of the task at hand it is important to manage expectations. And judging by CMU’s progress timeline so far it could take decades to forge a consensus among member states.
So the market should not be surprised that there hasn't been a significant breakthrough in the last eight years. In context of what the project is trying to achieve, eight years has not really been long enough to make a considerable dent. Even another eight would not be that surprising.
Unified and comprehensive
Originally launched by the European Commission in 2015, the overarching goal of the Capital Markets Union is to create an integrated capital market across member states.
And the project has the backing of much of the continent's top brass. In a speech at the European Central Bank on November 17, Christine Lagarde argued that Europe needs a unified and comprehensive rulebook if it is to compete on the global stage, and that those rules should be implemented from the top down.
Lagarde called for a single, central regulator — an equivalent of the US Securities and Exchange Commission for Europe. A single rulebook enforced by a unified supervisor would help to "mitigate fragmentation,” she added.
But achieving consensus or even near-consensus between member states about what a single rulebook should consist of, and in effect getting member states to agree to a framework by which their company law, corporate law, insolvency law, tax basis and pension plans are all brought to level playing field, is an enormous political challenge.
Lagarde acknowledged this, suggesting that for a project of this magnitude to succeed, the "unwavering determination of all actors — in both public and private sectors — is crucial".
Indeed, the future of Europe's success as an economic powerhouse likely depends on political cooperation.
Top-down or bottom-up?
But there does need to be greater momentum to keep things going, and Lagarde's speech should act as something of a catalyst. She argued that a change of tactic from a piecemeal bottom-up approach led by member states, to a top-down one implementing an EU-led framework, would likely speed things up.
But how this works in practice depends on the version of the CMU that eventually permeates.
The Listings Act for example — part of the CMU action plan — was implemented in a top-down fashion because, as an uninvasive policy change, it had consensus across European member states.
But when it comes to harmonising tax matters, insolvency law, and reforming pension plans, these are likely to only be changed at member state level. Individual countries have their own goals and budgets, and a change to something as sensitive as a pension plan is too invasive for the EU to handle.
In Germany there are feisty debates about pension reform, and in France there were riots and strikes this year in opposition to minor changes in its own rules.
And while member states' governments do realise there is an issue with pension planning amid an increasingly large retired population, encouraging private sector saving can be very diffcicult.
Lindsey Piegza, chief economist at investment baking firm Stifel, said that coordinating this across the entire continent is "incredibly difficult... because you've got so many different countries with slightly different goals all coming from different places in terms of their state pension plans".
From a bureaucratic standpoint, it's going to take a very long time to figure out how to appease everyone involved. A quick look at the mess caused by Brexit, just one country changing its ruleset, is a good indicator of the depth of the work involved.
Pension reforms alone show that without some form of coordination, progress is likely to remain stunted. For a top-down approach, a consensus or majority vote on certain EU-wide frameworks is required, but this process could take decades.
Hoping for a top-down approach on everything is a little far-fetched, and the end result is more likely a patchwork of the two.
The real question for the EU is whether that is a luxury it can afford. The bloc's share of global GDP, company market capitalisation, and in effect, relative wealth, is shrinking.
Lagarde has called for a renewed sense of urgency, and it is time member states started listening.