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Enrico Letta’s report: a single financial market for Europe

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Enrico Letta’s report: a single financial market for Europe

In the midst of multiple crises (war in Ukraine, Middle East, strategic rivalries between groups of medium and large powers, ruthless economic competition between large production areas) the European Union is looking for its “momentum”, the push model to avoid a overall weakening of its position in the world. The lever that can change things, overcoming tired institutional evolutionism, is condensed in trinomial “capital market union”. It is one of the qualifying points of the report on the EU internal market that the former prime minister Enrico Letta prepared for the European Council. It comes alongside the report on competitiveness that Mario Draghi is preparing for June (after the vote). It is easy to believe that the harmony between the two extensors will be almost total.

The Capital Market Union it’s one of those visions that are understandable only to professionals: in a nutshell it’s about having a integrated financial market, without internal barriers, with common rules and supervision, capable of financing the European economy. Launched in 2015, progress is limited. It didn’t go like the banking union: in reaction to the financial crisis originating from the USA at the end of the first decade of the century and then prolonged with the sovereign debt crisis, banking supervision in the euro area was effectively centralized under the aegis of the ECB, a piece of European “monetary federalism”. For the banks we proceeded from above, for the financial markets we proceeded from below with the result that they remain substantially national.

Europe can no longer do without a single financial market

To have or not a barrier-free capital market makes a difference to the financing of the economy and here the gap between the EU and the USA is enormous. For example, equity financing at the end of 2023 represented only 84% of euro area GDP versus 173% in the United States. The bottom venture capital largest European (investments in start-ups or companies with high growth potential) is lower in amount raised than the tenth largest American. Not having a single financial market deprives Europe of a resource that it can no longer do without. Letta explains to the heads of state and government, in line with Draghi, that the EU cannot afford the luxury of doing nothing. He recalls that in the EU there are 33 thousand billion in private savings, of which every year around 300 billion leave Europe to head to the USA. European savings that return to Europe in the form of investments to finance it shopping of important European companies. A paradox.

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The leverage of integrated European finance is decisive when they accumulate epochal transitions: “green”, digital, defense/security, new phase of enlargement of the European Union (Balkans and in the future Ukraine and Georgia), strengthening of social coverage (increasingly important if we want to maintain citizens’ consensus on Green Deal). At stake are the defense of the European industrial fabric, the response to the displacement in the production of solar panels, batteries, electronic chips, artificial intelligence, the reduction of dependence on leading edge production carried out elsewhere and on imported raw and rare materials.

The investment effort required is enormous, is calculated at several hundred billion euros per year for many years. Only for the green and digital transition around 750 per year until 2030. These are the minimum accounts of a European IRA (reference toInflation Reduction Act which supports the industrial and green turning point in the USA). State coffers will not be enough, in times of skyrocketing public debts, nor will the banking channel, which constitutes the main source of financing for businesses. And not even current European resources: the EU budget is worth less than 1,100 billion for 7 years, plus 800 from Next Generation EU until 2026. Of course, there is the European Investment Bank, of which the EU states are shareholders, which has an effective capacity to mobilize private capital, but should be recapitalized to increase its power.

The option proposed by Letta: a unified “safe asset”.

The action proposed by Letta implies overcome deep divisions: a front of countries led by Luxembourg opposes the prospect of centralized supervision of financial markets; another front is pushing to force the steps by creating a common European savings product to aggregate the supply of capital, ensure a good return for subscribers and funds to invest in European projects, also proceeding with a group of volunteers. It is the French idea supported by Italy. Chancellor Scholz is inclined to follow these paths, but the German government appears divided. Letta proposes to force the stages by issuing by 2026 a unified “safe asset” by centralizing all EU bond issues to channel the savings of ordinary citizens into financing the real economy. It is not a smooth road because competition in the emissions market is effective and no government wants to risk crowding out investor preferences (i.e. bond EU agencies have the highest rating rating). It would also be a significant step for the positive effects for the transmission of the single monetary policy and for the global role of the euro. Economy and geopolitical role are intertwined.

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The lever of unified capital market would crown the most general action for integrate the energy and telecommunications markets, the latter sector in which there are too many operators and the economy of scale is minimal compared to the USA and China. It would then be useful for ease pressure on public aid to businesses: Letta proposes more rigor at the national level compensated by more support at the European level and imagines a mechanism that requires countries to allocate a part of their national business funding to support pan-European investments. Even on this the road will not be downhill. Furthermore, it unblocking of the capital market could convince the “frugal” states, Germany in the lead, for example accept common debt issuesthis too is an inevitable prospect if the EU really wants to avoid competitive crowding out with the United States and China, which are able to support the national industry with huge transfers and use of public money (in the Chinese case through unfair subsidy).

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