ECB President Christine Lagarde called Friday for a European Securities and Exchange Commission and the creation of a single capital market to help raise the trillions of dollars needed to meet the challenges looming from "deglobalization, depopulation and decarbonization." File photo by Erik S. Lesser/EPA-EFE
Nov. 17 (UPI) -- European Central Bank President Christine Lagarde called Friday for a European Securities and Exchange Commission and the creation of a single capital market to help raise the trillions of dollars needed to meet the challenges looming from "deglobalization, depopulation and decarbonization."
Replacing the bloc's medley of national-level supervisor bodies with a single Europe-wide financial regulator akin to the United States' Securities and Exchange Commission could solve the problem of EU rules being applied unevenly, Lagarde told a meeting of the European Banking Congress in Frankfurt, Germany.
A new regulator with sufficient powers, including direct supervision, to diminish systemic risks from large cross-border firms and market infrastructures such as EU central counterparties, married with a unified capital market could, Lagarde said, turbocharge the private sector's contribution to economic challenges neither Europe's governments nor financial institutions can afford.
"To give a sense of the volumes involved, the European Commission estimates that the green transition alone will require additional investment of $672 billion every year, on average, until 2030, and a further $136 billion per year will be needed for the digital transition," Lagarde said.
She warned the EU can't "rely on our existing framework to finance this investment."
"Governments have the highest debt levels since the Second World War, and European recovery funding will end in 2026. Banks will have a central role to play, but we cannot expect them to take on so much risk on their balance sheets," Lagarde added.
She said that with the EU at a "critical juncture" with the "three Ds" of deglobalization, declining working age population and decarbonization looming larger and increasing signs the global economy was fragmenting into competing blocs a genuine capital markets union, or CMU, was "indispensable."
The EU has been working toward a CMU -- including plans for a unified stock exchange -- since 2015 but progress has been slow and Lagarde is pushing to get the project back on track.
She said the issue was not just that SMEs could not tap capital markets, but lack of capital market development impacted banks' ability to write riskier loans.
Creating a true CMU would mean building a sufficiently large securitization market, allowing banks to shift some risk to investors, release capital and unlock additional lending.
"In the United States, banks have access to a securitization market that is three times the size of Europe's. This could be even more powerful in our bank-based financial system. Second, underdeveloped capital markets mean that the young, disruptive firms that drive innovation have less access to the quality of financing they need," said Lagarde.
European start-ups attract less than half the funding of American ones while investment in scale-ups is four-fold that of Europe with analysis indicating rapid CMU evolution could lead to an additional 4,800 European firms raising an extra $581 billion annually.
U.S. bond markets and venture capital are also three-fold and five-fold the size of those in Europe.
"We will not succeed in these transitions if we don't get CMU back on track," said Lagarde.
