Two key policy proposals of the new Commission that should help achieve these priorities are the Capital Markets Union and the Digital Single Market. These proposals should enable European companies – SMEs in particular – to fully reap the benefits of the digital economy and unlock more and more diversified funding for companies as well as reduce the cost of raising capital.
The EU lags behind other jurisdictions when it comes to using debt and other capital markets to finance companies. It lags behind in the global digital economy. European businesses are heavily reliant on banks, which makes them very vulnerable to a tightening of bank – lending (as has happened since 2008). Moreover, capital markets can provide a second (or further) round of funding that is often problematic for SMEs. As a result, such companies are often sold to the US before they can have real economic impact (jobs!) in the EU. The Green Paper on the Capital Markets Union also acknowledges that new technologies are an important driver of further integration of capital markets. The Digital Single Market strategy acknowledges the need to increase access to finance capital and aims to establish a supportive investment climate that should make appropriate financing available, notably for start-ups.
It remains to be seen how exactly digitalisation will impact the financing of the EU’s economy. Obviously, the financial sector is at the forefront of using new technologies and significant further efficiency gains can be made. At the same time, large parts of the sector have not yet jumped on the digital bandwagon. For example, according to a recent McKinsey report, 90% of the European banking sector invest less than 0.5 percent of their total spending on digital and European retail banks have digitized only 20 to 40 percent of their processes. The ongoing digital revolt could nonetheless call into question some of the traditional advantages the (retail) banking sector holds over competitors, i.e. the branch network and the underpinning payment infrastructure.
It will be a challenge to put in place all of the required building blocks for a genuine capital market, in particular to harmonise national insolvency, taxation and securitisation regimes. The same holds true for the Digital Single Market. Digitalisation could potentially have a profound impact on how financial intermediation takes place in the EU. However, it will be a challenge to transform the buzzword into actual measures that have a real impact on the manner in which the financial sector funds the EU economy, in particular start-ups and SMEs.
This topic will be debated at the European Business Summit on 6th and 7th of May – see agenda here