Europe has been caught in the middle of the US-China trade war, as falling international demand has worsened the slowdown in economic growth across the region.
Member states are beginning to work with more urgency to overhaul the bloc’s financial infrastructure.
Sylvain Broyer, chief EMEA economist at S&P Global Ratings, said the US-China trade war was already having a “huge impact on EU policy. It is a difficult task, but Europe now has no other choice than to reinforce the international role of the euro,” he said.
Much of the political focus is likely to be on creating a Capital Markets Union in the EU. In the last 16 months, policymakers have penned 13 pieces of legislation on it.
“[Brexit] is why Capital Markets Union is so important,” said Jörg Kukies, state secretary for financial market policy and European policy at the German Ministry of Finance. “We are losing what is the biggest capital market in the European Union by miles. It is not a close second, London is by far the most important market for financing a lot of the big European corporates.
“On the one side we have to make sure that relationship remains strong, but on the other side, the EU now has to improve its own capital markets.”
Paul Sheard, senior fellow at Harvard Kennedy School, said: “This is a giant moment of truth for the EU. On the one hand, you have the UK, its second largest economy, set to leave the club. On the other, there is all of this leftover homework from the last 10 years and it all needs to be done.”
Expert Report
Earlier this month, an EU expert group published a paper detailing priorities for reforming capital markets. The group had been set up at the behest of the German, French and Dutch finance ministers, with backing from seven other member states.
“There was a danger of losing momentum, especially with Brexit,” said Panagiotis Asimakopoulos, a senior research analyst at thinktank New Financial. “But they are clearly now starting to realise in the EU 27 just how important it is to build stronger capital markets.”
European companies have traditionally relied on banks for financing. But in their October report, the EU expert group recommended that the EU massively develop equity markets.
Ignazio Angeloni, until recently a supervisory board member of the European Central Bank, said: “There is a potential to develop SME financing more, if we have a complete capital market alongside banks,” he told GlobalMarkets. “Banks are now reluctant to lend to SMEs, but if you can bypass them, probably I think that would help remove some of the financing constraints, especially if you do it on a cross-border basis.”
Wolfgang Köhler, the board member at DZ Bank responsible for investment banking, made a different emphasis: “A lot of the SME backbone are family companies and privately held,” he said. “They are not willing or able to tap capital markets — we need to find other vehicles, like investment funds, SPVs, structured products. Not all financing failed in the financial crisis — there was not a credit crunch in Europe. Loans and savings banks made sure SMEs kept going.”