Opinion

Save markets to save the single market

It’s time for the EU to make quick and indispensable progress in forming a capital markets union.

By: Date: May 15, 2020 Topic: Banking and capital markets

Necessary though it was, the temporary relaxation of state aid rules in the EU has brought grave unintended consequences. Through indiscriminate support, the EU is rapidly moving from an even playing field that promotes the “survival of the fittest” to a situation where only those with the “richest parents” survive.

The EU economic system will come out battered and unbalanced. Countries in the south will lose a substantial part of their production fibre as they lack the means to save those in need. But indiscriminate help in the richer north will also delay the natural sorting between productive and unproductive firms. As companies slip into liquidity problems, they risk predatory takeovers below their market’s worth from EU and non-EU firms rushing to exploit market distress.

The EU needs to reverse this process and needs to think about how to safeguard all markets. We see reasons for rethinking state-aid rules and making some long needed progress with creating capital markets.

Clearly, some form of state-aid rules must be reinstated as quickly as possible to preserve the integrity of the single market.  However, for as long as state-aid rules are not in operation, the EU must rethink a strategy for the future of its industry.

For all its faults, the current relaxation of such rules offers a unique opportunity to rethink how the rules must be adapted to a new global order. State-aid rules have up till now constrained the EU from defending itself against rising global structural imbalances. The new but crucial objective should be the notion of economic sovereignty. Decide which industries should be promoted as necessary for sustaining economic independence and protect the EU from unfair practices elsewhere, without however succumbing to protectionism.

In the meantime, national “rescue” operations cannot be indiscriminate but have to be based on balance sheet information before a cut-off date.

Productive firms will be asked to drive the recovery, so they need to be ready to go. They need to be given liquidity, preferably in the form of grants not loans, to prevent the negative future consequences of accumulating debt.

Firms with very precarious balance sheets, on the contrary, should be allowed to fail. Their employees should receive support through unemployment benefits and help with employment transition. This would be the best pursuit of societal purposes.

The real problem however rests with a third category of firms, the largest of all: those who are neither clearly productive nor clearly failing. The difficulty in deciding what to do for them was the real reason behind the policy of indiscriminate support.

Markets are the only ones capable of sifting through the risks the EU currently faces and identify who is the fittest to survive. The best the EU can do is provide the legal certainty necessary for this to happen.

A tempting response for some is to call for state participation in the form of equity. If taxpayers are to take a share in the losses, the argument goes, they must also have a share in the profits.

This argument is seductive, but it puts the role of the state on a par with the markets. The state can support those that are clearly productive, in its role as a buffer against truly unforeseen circumstances. But it is not well placed to identify those that are worth saving. Its involvement in this third, problematic category, needs to be limited, therefore, to encouraging others to do it.

Should it be banks? Partially yes, but mostly no because banks are constrained in how much risk to take and they are not meant to have “skin in the game”. But if not banks, then who?  The answer is capital markets. Unfortunately, the EU is very poorly prepared in this respect.

It’s time for the EU to make quick and indispensable progress in forming a capital markets union. And it can do it, as it did with Banking Union during the previous financial crisis. This could take the shape of a “28th regime”: a separate legal jurisdiction, created from scratch and separate from any national jurisdiction. By design, it should encourage more private capital involvement, domestically but also across member states.

Markets are the only ones capable of sifting through the risks the EU currently faces and identify who is the fittest to survive. The best the EU can do is provide the legal certainty necessary for this to happen.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global economy and trade, Testimonies Date: July 15, 2021
Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Banking and capital markets, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: Macroeconomic policy Date: July 14, 2021
Read article More on this topic
 

External Publication

A Global Deal for Our Pandemic Age

Report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

By: Tharman Shanmugaratnam, Lawrence H. Summers, Ngozi Okonjo-Iweala, Ana Botin, Mohamed El-Erian, Jacob Frenkel, Rebeca Grynspan, Naoko Ishii, Michael Kremer, Kiran Mazumdar-Shaw, Luis Alberto Moreno, Lucrezia Reichlin, John-Arne Røttingen, Vera Songwe, Mark Suzman, Tidjane Thiam, Jean-Claude Trichet, Ngaire Woods, ZHU Min, Masood Ahmed, Guntram B. Wolff, Victor J. Dzau and Jeremy Farrar Topic: Global economy and trade Date: July 9, 2021
Read article More on this topic More by this author
 

Opinion

What to expect from the ECB’s monetary policy strategy review?

Emphasis will be placed on greening monetary policy and clarifying the ECB's price stability objective, but is this enough?

By: Maria Demertzis Topic: Macroeconomic policy Date: June 23, 2021
Read article More on this topic
 

Blog Post

The socio-economic consequences of COVID-19 in the Middle East and North Africa

Confronted with COVID-19, high-income Gulf countries have done better than most of their middle- and low-income neighbours; Jordan and Morocco are also positive exceptions.

By: Marek Dabrowski and Marta Domínguez-Jiménez Topic: Global economy and trade Date: June 14, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: Banking and capital markets, European Parliament, Testimonies Date: June 9, 2021
Load more posts