EU – Baltic States, Financial Services, Modern EU

There are some positive signs in the EU’s growth; thus, real GDP in the euro area has been growing for over a year as well as employment while unemployment continues to fall (although it remains above pre-crisis levels). Quite remarkable that private consumption is still the engine of the recovery; investment growth continues even if it remains subdued.

In the latest forecast, the Commission expects GDP in the EU to grow by 1.8% both in 2017 and 2018. These tends prove that the EU’s economic policy mix – investment, structural reforms and responsible fiscal policies – is working.

However, this positive outlook remains surrounded by uncertainty, said Commission Vice-President Dombrovskis. Progress is uneven across EU countries and some states still have high levels of public and private debt. Many Europeans do not yet really feel the economic recovery, and there are apparent signs of increased inequalities in the member states. 

Besides, Europe is facing new geopolitical challenges, e.g. migration, conflicts and instability among the neighboring states. For the first-time EU member state –the UK - is leaving the EU. These challenges need a broader reflection, which Commission President Juncker described in the White Paper on the Future of the EU. See, for example:  

http://www.baltic-course.com/eng/modern_eu/?doc=128015&ins_print.  

Three spheres in the financial sector to assess

There are a number of areas in the financial sector where both the EU and the member states can reduce uncertainty and strengthen the recovery.

First, there is a need to tackle remaining vulnerabilities in financial sector and non-performing loans (NPL). A broad consensus has emerged that high ratios of NPLs in several member states are weighing on the performance and viability of the EU banking sector. This has negative implications for economic growth and financial stability.

Based on historical experience and current trends, there is an urgent need to accelerate the NPL clean-up: it would take another 10 years to clear the total current NPL stock. Capital relief could support lending by up to €500 bn over the next years, in particular in the states which need it most. In the EU-27, the level and structure of NPLs differ significantly across national banking sectors. However, most of the policy instruments to address NPL problems are within the competence of the states and the states are primarily responsible for addressing NPL problems.

But there are EU issues as well: weak growth in some states due to high NPLs affects economic growth in other states; besides, investors often perceive the soundness of EU banks more generally as a function of weak balance sheets of some banks.

The spill-over effects suggest that national authorities and European institutions have to join forces by designing an EU strategy which would support the states in tackling NPLs. The member states need a combination of measures, e.g. including reformed insolvency frameworks, stronger judicial capacity, and measures to foster larger and more efficient secondary markets for NPLs. These measures could include the set up of national asset management companies based on a common blueprint. The member states need to accelerate and join up efforts.

The Commission is already actively contributing to a number of these efforts: supporting reforms through the European Semester and the Structural Reform Support Service. The EU helps the states to design NPL measures within the help from EU’s state aid and resolution framework.

Second, the need to accelerate Capital Markets Union which will unlock additional financing for growth. According to some estimates, the development of EU capital markets could unlock € 2 trillion of assets to invest in the EU economy and could lead to more than € 50 billion a year in additional financing for companies.

Building EU’s capital markets is facing a big challenge: Europe’s largest financial centre will leave soon the EU single market. Hence, there is a growing sense of urgency for developing a Capital Markets Union amongst the 27 remaining states.

The Commission has done its “home-work” by delivering 16 out of the 37 measures of the CMU Action Plan; soon the European Parliament and the Council will deliver on securitisation and venture capital issues. Consultations show strong support for the objective of a stronger capital markets system and it will help to launch a CMU mid-term review in the summer.

Thus the EU’s CMU core policy themes are stable: improving access to risk finance for SMEs, enabling institutional investors to invest in longer-term assets such as infrastructure and energy transition, more effective and rewarding retail investor engagement with capital markets, sustainable and green financing, and removing remaining barriers to cross-border investment.

In the second phase of the project, the Commission will refresh the strategy and establish Capital Markets Union by 2019.

Third, the EU needs to address regulatory and supervisory framework to ensure the right supervisory framework for the EU’s integrated financial markets. Since their establishment, the European Supervisory Authorities (ESAs) have contributed significantly to a robust financial framework for the Single Market, also underpinning Banking Union. However further progress in supervisory convergence is needed to promote the CMU for all EU states, improve integration within the single market and safeguard financial stability.

While the ESAs have started to shift attention and resources to analyse risks to consumers and investors and undertake more work to increase supervisory convergence, work in this area must be accelerated. The ESAs also have a major role to play to capture the growing benefits of technological developments such as FinTech, whilst addressing any possible risks arising in this context. Changes to the current legal framework are needed to enable the ESAs to fully deliver on their mandates. In order to gather evidence, the Commission has recently launched a public consultation focusing on a number of issues related to the ESAs' tasks and powers, governance, supervisory architecture and funding with the aim to identify areas where the effectiveness and efficiency of the ESAs can be strengthened and improved.

The ESAs comprise the European Banking Authority, EBA; European Insurance and Occupational Pensions Authority, EIOPA; and the European Securities and Markets Authority, ESMA; all established in 2010 by the EP and the Council.

http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32012R0648

Brexit & EU’s financial sector

Central clearing of derivatives is an area in which Brexit will profoundly change the EU's financial landscape. The UK accounts for a significant amount of Europe's clearing activities. So it is all the more important to consider how Europe's framework for the clearing market will develop; four points are important in this regards, argued the Commissioner.

First, recent consultations with the member states have shown that EMIR provides a framework which has brought transparency and mitigated systemic risks in derivative markets.On EMIR, see Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

Second, the EU will continue making the system more efficient and reducing disproportionate costs and burden. Commission received many sensible suggestions from stakeholders and will come out soon with legislative proposals.

Third, Europe's clearing markets should continue to be part of integrated international markets. In this area the EU is committed to maintain and develop strong international standards, alongside other international partners. Based on these standards, the principle of equivalence is important for EMIR, for which the EU recently extended equivalence to a number of jurisdictions.

Fourth, due to the success of EMIR, ever larger volumes of derivatives are cleared centrally in a small number of CCPs which are of systemic relevance in the EU. As set out in the ESAs review, there is a need to continue developing the EU's supervisory and resolution system.

A specific issue is dealing with a very significant proportion of clearing activities in certain market segments currently occurring in the UK. That activity would in future therefore be outside the EMIR framework. This will surely be a matter of important reflection in the coming months and years. 

For financial markets in EU-27, integration is an existential question: only together the states can secure the depth and liquidity for markets to function efficiently, the scope for innovative finance to develop and scale up, and the strength to finance states’ economies. Hence, the EU's internal market for financial services shall be strengthened to support Europe's economy and citizens.

Reference: Speech by Vice-President Dombrovskis, in:

http://europa.eu/rapid/press-release_SPEECH-17-898_en.htm