Ladies and gentlemen,
It’s a pleasure to be here and to have the chance to talk to you about the work we’re doing to build a single market for capital in Europe.
As the home to the world's first stock exchange, where could be better than Bruges to come to talk about the Capital Markets Union? Back in the fourteenth century, traders were coming to do business in Bruges from all over Europe. And soon this commerce needed more advanced finance to support it. Over the course of the century, as trade grew, the world's first stock exchange developed into the Low Countries' most sophisticated money market. Trading with the world, powered by an advanced infrastructure and financial markets, Bruges went from strength to strength. And it remained a vibrant commercial city until the Zwin channel silted up, ending Bruges' golden era.
Today, as we think about the Commission's number one priority - supporting growth and jobs in Europe - it's good to reflect on the reasons for Bruges' success six hundred years ago. Like your forefathers, we want a Europe that's open for business and trading with the rest of the world. We want a Europe that's exploiting the single market's full potential, supported by a modern infrastructure. And we want better developed and more integrated financial markets.
Today, growth is back but economic activity is obviously not as strong as we would like. Forecasts for GDP growth this year hover around 2%. Unemployment is of course much too high - around 10% across the EU - and one in five young people are still out of work. Outside Europe, growth is slowing in China and other emerging markets. Global trade is weak and the continued instability on the EU's southern borders, with the refugee crisis that flows from it, is also a serious challenge.
This environment makes a focus on growth all the more essential. It underlines the importance of the Commission's agenda of competition and trade. It motivates us to legislate less and legislate better, so that businesses can enjoy a period of stability to plan ahead. And it propels me in my work to build deeper capital markets that can increase the sources of funding for Europe's businesses and provide more opportunities to Europe's savers.
A few figures demonstrate the nature of the challenge we face. Europe's economy is about the same size as that of the US, but our capital markets are only half their size. Our corporate bond market is a third of the size; our venture capital markets a fifth. US SMEs get about five times more funding from capital markets than in Europe.And the US has twice as many small company IPOs as we do.
By contrast, European SMEs receive 75% of their funding from banks. European companies are four times more reliant on banks than American ones. And Europeans save at least three times as much in bank accounts as they do in capital markets. Does this matter? Well, the crisis taught us what happens if you put all your eggs in one basket. As the banking sector deleveraged, the liquidity needed to keep the European economy growing disappeared. And companies, particularly SMEs, could no longer get the funding they needed to invest, to launch new products, to compete.
So our reliance on banks has slowed Europe's recovery. The size of the economic shock we experienced meant bank balance sheets could not be rebuilt overnight. Banking activity retrenched along national boundaries and this trend intensified with the sovereign debt crisis. As cross-border lending declined, it became harder to spread risk. Europe lacked the shock absorber function that capital markets provided in America. Alternatives to bank financing helped the US economy bounce back quicker after the crisis.
So stronger capital markets would increase financial resilience. They would help money flow through the EU to where it can be most productive. They could connect savings more effectively to growth, channel investment to projects that need financing, give companies a greater choice of funding, and increase the options for people saving for the long term.
If those are the overall goals, if that's the direction, my approach is to go step by step, not trying to go for some top down grand vision, but to build confidence and momentum from the bottom up. That's why we started by consulting widely to flush out all the issues we need to tackle. Everything in our CMU Action Plan stems from that consultation. It's ambitious in scope and broad in sweep. We have designed it to start fast but also to keep up the momentum in the months and years ahead. There is no silver bullet, no single lever I can pull, but rather a mix of inter-connecting measures that will together help create a stronger and deeper single market.
At the heart of what we are trying to do is an effort to improve the funding conveyor belt for businesses. We want to increase funding choices for companies and the overall flow of capital so that more businesses can get the financing they need at each stage of their development.
So starting with companies in their start-up phase - for entrepreneurs with innovative ideas - we're working on ideas to strengthen venture capital markets. We’ll begin this year by amending existing legislation governing venture capital funds to build up scale, diversity and choice. We’ll look at how we can use public money to attract private investment with a pan-European venture capital fund of funds. We are keen to encourage the development of crowd-funding as a source of financing for start-ups. And I want to see whether we can support the development of industry-led business growth funds to support equity in SMEs.
We also want to free up more bank lending to smaller companies. That's why we've made a proposal to restart Europe's securitisation markets. Our proposal sets out criteria for simple, transparent and standardised securitisation, with reduced bank capital requirements for securitisations that qualify. Council reached an agreement on this in record time as governments know how important it is to free up the supply of bank lending. The onus is now on the European Parliament to take this forward. Every extra day that this proposal takes to pass into law is one more day of a missed opportunity for growth.
For companies that are growing, I want to look at existing private placement markets that work well and see whether we can build on them. They're now well-established in France and Germany, and it's a market that's taking off in the UK. Based on this experience, these markets could be a powerful source of funding for medium sized companies when they want to raise amounts above twenty million euros from institutional investors.
To make it easier for companies to tap public markets, we’re overhauling the Prospectus Directive to create a simpler, faster and cheaper prospectus regime. I want to streamline the process for companies which have already issued a prospectus and want to raise capital again: that's currently about 70% of all prospectuses. And we're proposing to get rid of the prospectus requirement completely for companies that only want to raise small amounts, under 500,000 euros. Next year we'll complete a wider review of regulatory barriers that SMEs encounter when they want to list.
To deepen financial markets for companies of all sizes, we are also working on knocking down barriers to cross-border investment. For investors to enjoy more choice, I want to improve the passport system we have for investment funds so they can offer their services more easily and compete in different markets. This year we’ll launch a consultation to identify the main barriers to funds operating in other countries than their own. I want a system where investors can get hold of enough information, where they’ve got more choice, and where investment funds can genuinely compete with each other across borders.
By the end of the year we’ll bring forward proposals to try to reduce differences between national insolvency regimes. We want to try to make company restructuring easier, and to increase certainty for those wanting to invest across European borders. Our proposals will seek to address the most important barriers and again, build on national regimes that work well.
We’ll look to see whether we can make cross border investments easier by simplifying the system to reclaim withholding tax when these are subject to double taxation. At the moment, cross border investments are penalised by double taxation on dividend income, interest payment and capital gains. The process for reclaiming these withheld taxes can be complicated and off-putting. The cost of reimbursements foregone for this reason is estimated at around 8 billion euros a year. We want to make make the whole process simpler.
And to inject more savings into capital markets we’re considering proposals for a European market for simple personal pensions. This could provide the economies of scale we need to reduce cost and increase choice for savers who are putting money aside for their retirement. So this year, we’ll work out exactly what steps might be needed to make this happen.
While we work to develop Europe's capital markets, I also want to understand the impact that the legislation passed in recent years might have had on funding the economy. To get the crisis under control and safeguard financial stability, we passed a whole raft of laws. They've made our financial sector stronger and more resilient. But now, as we work to support investment, it makes sense to review those rules, to check they're working as intended, that they're as growth friendly as possible and that our system's not silting up, like the Zwin did centuries ago.
To do this, we launched our Call for Evidence. It's just ended and we're working through the hundreds of responses we received. It's too early for any definite conclusions. But three themes are emerging. Respondents have said that in places our legislation is not proportionate enough; that it could be weighing down the amount of financing available to the wide economy; and that the compliance burden is too high. We'll continue working through the evidence and come forward with our thinking this summer. If there's evidence that the same prudential objectives can in places be achieved in a more growth friendly way, we’ll give careful consideration to how this this might be done.
To any British Conservative of a certain age, Bruges is linked with the speech that Margaret Thatcher gave here nearly thirty years ago and the question of Britain and Europe. So let me say a few words about that.
Re-reading her speech earlier this week, I was struck by how much some things haven't changed, but also how much some things for which she argued strongly then have today become a central part of our everyday agenda.
Then, she clearly felt she had to make the case in favour of a single market and in defence of free trade. She also spoke, a year before the Iron Curtain came down, of the desire of Central Europe to be free. Today, strengthening the Single Market sits at the heart of the Commission's agenda. We're working to deepen it, not just in financial services, but in energy and digital services. On free trade, we're pursuing agreements not just with America, but with a whole host of other countries like Japan, Vietnam, and New Zealand. And of course the enlargement of the European Union is not the subject of speculation but a reality. So for me, Mrs Thatcher's Bruges speech serves as a useful reminder of how far things have moved and of the influence the UK has had in helping to shape the agenda of the EU.
Since then the UK has greatly benefited from being part of the Europe Union’s single market, particularly when it comes to financial services. Financial services are the UK’s most important export, and the rest of Europe their first destination. Over the past decade, the surplus from Britain's trade in financial services has more than doubled, from £23 billion in 2004 to £58 billion in 2014. Last year, London was once again rated by the Global Financial Centres Index as the world's most competitive financial centre. So I think it's quite hard to argue that London is being "strangled" by regulation as is sometimes claimed.
This success obviously owes much to London's intrinsic strengths. But it is also linked to membership of the Single Market. That's what's helped UK banks lend over 1 trillion euros and take over 1 trillion euros in deposits across the EU last year. Passporting, whereby any financial service business established in one EU country can do business in all 28, is one of the reasons that the British fund management industry can look after a big chunk of the 8 trillion euros market in Europe's globally successful investment product, UCITS.
That said, there’s no denying that in Britain, as in other European countries, people from across the political spectrum have in recent years been asking questions about the EU, about its direction, about its future.
I do think the settlement reached recently at the European Council helps address some of those concerns. Its focus on competitiveness, on proportionality and subsidiarity is important to the whole European Union. In the area of economic governance, the settlement recognises the need of the euro area to integrate further, for the deepening of economic and monetary union. But it also enshrines for the first time the principle of non-discrimination against businesses on the grounds of currency. And it confirms the integrity of the single market, giving both euro ins and outs the assurance that their companies will be able to compete on a level playing field. I believe these new arrangements will help build trust on all sides so that financial services inside, and outside, the euro area can thrive.
As the person who is responsible helping to draw up the rules for Europe's financial services, one thing is clear to me: if the UK were to vote to leave, it's fantasy to suggest it could quickly secure access to the single market on the same terms as it has today.
If it followed the existing models for countries outside the EU, the UK would still have to pay to have access to the single market, it would still have to accept free movement of EU migrants, and it would of course still have to follow EU rules. The difference would be that it would have no say over the rules it would have to obey. Or it could ask the EU to have its rules recognised as being equivalent - a long and uncertain process - and even then businesses such as banks and insurance would have to set up a separate base in the EU to do business there. As is becoming increasingly clear, there is no convincing answer to how arrangements outside the EU would be better. Only one thing is certain: everything would be uncertain. And uncertainty is usually the enemy of investment.
Meanwhile I am focused on building the Capital Markets Union. A single market project for all 28 Member States, but from which the UK certainly stands to benefit. I'm under no illusion that it's going to be quick and easy. It will require us to stick with it, to keep hammering away at the barriers to free movement of capital over the years ahead. But I'm encouraged by the political support I have had from all sides. Support for an opportunity to make Europe's economy more stable, to give businesses more choices of funding, and to help them expand.
The difference we can make is real. If we could reform the Prospectus regime we could save listed companies alone up to 100 million euros a year. If we could grow equity markets across the EU to bring the smaller ones up to the European average, 25 billion euros of additional capital could be raised each year. If we could restart our securitisation market, we could free up 100 billion euros of extra credit to the private sector. And if we can do all this while striking the right balance in our approach to legislation, we have a great opportunity to support investment and jobs, to make the European economy more resilient and to lift European growth prospects for the long-term.