Can a European Capital Market Survive Brexit?
When it comes to Europe's capital markets, the largest pools of liquidity remain located in London, and no one yet knows how Britain's withdrawal from the European Union will affect them. As signs of a slowdown in the European economy emerge, the need to refocus attention on a capital markets union is becoming more urgent.
LONDON – On September 30, 2015, in those far-off days when the United Kingdom was a fully-fledged member of the European Union, then-European Commissioner Jonathan Hill announced the launch of a new initiative called the “capital markets union.” Almost 60 years of European construction had still not created anything approaching a single market for investment, and in many EU countries capital markets remained weak and underdeveloped. The worthy aim, Hill wrote, was “to identify the barriers to the cross-border flow of investment,” and “work out how to overcome them step by step.”
Much liquidity has flowed under the bridge since then, and Hill is now drawing his euro-pension. But it is hard to see that a great deal of progress has been made. Indeed, the project may even have gone into reverse, as Brexit threatens to disrupt and divide the one well-functioning capital market Europe now possesses: London, which accounts for the majority of the market finance raised for European companies.
That likely split is highly unfortunate, to the extent that it worsens the real problem the European Commission identified. By comparison with the US, Europe relies heavily on bank finance. In the US, the corporate bond market is the source of almost three-quarters of finance for companies, with bank lending supplying the remaining quarter. In the 27 remaining EU countries, the proportions are almost exactly reversed. In the UK, it is about half and half: as is often the case, Britain is positioned somewhere in the middle of the Atlantic Ocean.