Ceci n’est pas un Capital Markets Union: Re-establishing EU-led financialization

Abstract

In the 11 years since the outbreak of the financial crisis, the EU has introduced many policy initiatives directed at the financial sector, the most recent one being the Capital Markets Union. The official aim is to integrate Europe’s financial markets, fulfilling decades-old wishes for a Single Market for capital. Some scholars have already voiced concerns about different elements of Capital Markets Union since its inception in 2015, but the extent to which this critique was generalizable remained unclear. Through an analysis of policy documents and interview data inspired by the ‘What’s the Problem Represented to be?’-approach, this paper reveals two common threads among the many Capital Markets Union proposals, which are not explicitly acknowledged: a reduction of prudential rules and various forms of incentivizing financial products with public funds. It is therefore argued that Capital Markets Union is not a market integration project (as its name and official narrative suggest), as much as it is the re-establishment of EU-led financialization, following a long tradition of asymmetrical integration in the Union.

Keywords

Capital Markets Union European Union financialization financial integration policy analysis

Introduction

In February 2015, the European Commission officially launched the Capital Markets Union (CMU). CMU is the title of a project aimed at establishing a ‘true single market for capital’ across the EU by integrating its quite fragmented capital markets (European Central Bank, 2018; European Commission, 2015a). Initially, the following objectives of CMU were promoted: improving access to finance for businesses and infrastructure projects, helping small and medium enterprises (SMEs) raise finance, removing barriers to cross-border investments, diversifying the funding of the economy and reducing the cost of raising capital (European Commission, 2015a, 2015b). The promise of CMU and a seamless financial European space is that it would make Europe more competitive and increase investment levels in the EU, in turn leading to growth and job creation.

In the 11 years since the financial crisis began, the pendulum in the EU has swung back from a crisis mode of re-regulating the financial sector and avoiding collapse to refocusing on growth and jobs as priorities (Bieling, 2013). The CMU project was presented as the solution to the (at the time of launching) ongoing recession, supposedly caused by the crisis and various conditions characterizing its aftermath, such as banks’ constrained lending capabilities and too low investment levels (European Commission, 2015a, 2015b). In line with that narrative, the promise of CMU was to finally ‘boost growth’ and deliver the jobs that EU institutions had been waiting for. The key slogan accompanying the creation of CMU was accordingly ‘unlocking funding for Europe’s growth’, implying that growth was currently constrained by the inability of ‘locked-in’ capital to reach existing investment opportunities due to obstacles.

Some scholars have already voiced criticism of CMU, albeit mostly on specific pieces of the agenda, predominantly the securitization package. Informed by the existing literature, this paper will extend those studies by investigating what the various CMU elements have in common and whether the critique of some of its parts can be extended to the entire project. The essential question that has not been answered is: if the policy proposals that make up the CMU project do not achieve the public policy objectives, what effects will they produce? In order to answer this question, key Commission documents on CMU published since its launch in February 2015 until the end of the Juncker Commission in 2019 were analysed, as well as two documents that pre-date CMU times and can be considered precursors to the project. By using a policy analysis inspired by the ‘What’s the Problem Represented to be?’ (WPR) approach, developed by Carol Bacchi, and triangulating the document analysis with interview data and other, publicly available documents, two types of policy solutions stand out in the sense that they do not fit the integration agenda. They suggest that CMU is also about expanding and re-regulating financial markets and not just about integrating them. The two recurring policy solutions I describe in this paper will likely benefit financial market actors at the cost of the public. The policy project can be better understood by placing it into a framework of EU-led financialization rather than apolitical market integration, and as such, it fits into a longer lineage of asymmetrical integration of Europe’s economies, where market building has stood at the centre.

The French part of the title of this paper is a nod to people in the Brussels Bubble. It refers to a famous painting that you can find in many different forms around Brussels. René Magritte’s oil painting La trahison des images’ (‘the treachery of images’) shows a pipe and underneath it the statement ‘Ceci n’est pas une pipe’ (‘This is not a pipe’). According to dominant interpretations, the Belgian surrealist wanted to show that a representation of a thing is not identical to the thing. The apparent paradox forces the consumer of the painting to reflect on the question of what the reality of any object really is (Foucault, 1983). The painting and many alterations of it are a common sight and source of humour in Brussels. The title of this article, Ceci n’est pas un Capital Markets Union, therefore points to the argument that the CMU policies will not create anything resembling a Union; launching a Capital Markets Union does not make a capital markets union. This paper asks what the reality of CMU is. If we have to identify commonalities among the plethora of policies making up the CMU, some policy solutions reappear that are characteristic of a deregulation and financialization agenda rather than of a market integration agenda.

The paper is structured as follows: Section ‘European integration and the politics of financialization’ will review scholarly literature on the politics of financialization and asymmetrical European integration and describe the state of the art of CMU. The following section will discuss critical public policy analysis and data. Section ‘CMU framing’ deals with the official narrative, whereas Sections ‘Pattern 1: preferential prudential treatment’ and ‘Pattern 2: incentivization through public support’ will discuss the two policy mechanisms reappearing throughout CMU elements. Section ‘The politics of CMU’ will present relevant interview findings and integrate findings on the politics of CMU, and the last part will conclude.

European integration and the politics of financialization

While literature on financialization is burgeoning, EU studies have not engaged with the concept much. Structural accounts of financialization define it as the rising relevance of the finance sector within the economy, e.g. the financial sector growing faster than the ‘real economy’, or overall rising debt levels (e.g. Dore, 2008; Foster and Holleman, 2010; Krippner, 2011; Lapavitsas, 2009; Stockhammer, 2012). It can also be defined more broadly: ‘the increasing importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, both at the national and the international level’ (Epstein, 2005: 3). Within the field of financialization studies, some have lamented the lack of focus on ‘concrete actors and decisions (or non-decisions)’ that drive the process of financialization (Nölke et al., 2013: 210). The latter authors call this aspect the ‘politics of financialization’, insisting that it is ‘stimulated, facilitated and shaped by political-administrative processes and political decisions’ (Nölke et al., 2013: 212). Similarly, Lai and Daniels (2015) underline the agency of the state in producing certain forms of financialization. They advance the concept of state-led financialization, where the state actively and strategically mobilizes firms and institutions to co-produce the conditions resulting in the increasing financialization of economies and firms.

There are virtually no studies on EU politics making the explicit link with the ‘politics of financialization’-lens. There are such studies on the US, such as Krippner (2011) and Quinn (2010), and some case studies focusing on a specific public institution below the EU level, such as Belfrage (2008) for Swedish pensions or studies on EU local authorities’ engagement with financial markets in Europe (Deruytter and Möller, 2019; Hendrikse and Sidaway, 2013; Lagna, 2015). There are also very recent efforts to conceptualize state financialization (Hendrikse and Lagna, 2017; Karwowski and Centurion-Vincencio, 2018), but there is almost nothing on the EU itself. One exception is Bieling (2013), who shows how pre-crisis, the EU took continuous steps towards an increasingly financialized capitalism, from the European Monetary System, initiatives in the single market programme, the implementation of the European Monetary Union, and the Financial Services Action Plan to the Lisbon Strategy (Bieling, 2013: 286–287). Furthermore, there is a history of critical analyses of EU integration that do not explicitly deploy the notion of financialization.

The vision of seamless financial markets and capital flows in Europe has, after all, existed since at least the 1957 Treaty of Rome that established the freedom of capital movements, and has become more concrete with the 1966 Segré report on the development of a European capital market (Maes, 2007: 21–32). Its proponents deemed a single and free market for financial services necessary for becoming more and/or remaining competitive, as well as for shielding Europe from instability in global markets (Dymski, 1999; Rosamond, 2002; Story and Walter, 1997; Tickell, 1999). Many scholars have voiced their concerns about the origin of such convictions and have pointed to an overlap of powerful interests and the market integration agenda. Ideas range from the existence of a transnational capitalist class (Van Apeldoorn, 2002; Van der Pijl, 1998) and a corporate Europe (Carroll et al., 2010) to asymmetrical integration favouring the interests of corporations and, increasingly, finance (Heemskerk, 2013; Jabko, 2006; Lapavitsas, 2009; Metz, 2018; Scharpf, 1988, 2010; Stockhammer, 2008; Verdun, 1996). These accounts share the view that financial integration in Europe and elsewhere is more and more driven by the interests of finance capital. In particular, two prominent studies have focused (one in part) on European banks and financial markets. Jabko (2006) argues that the Commission was the central driving force in pushing forward a ‘quiet revolution’ of far-reaching reforms in the 1980s and 1990s, and that it invented a political strategy to convince different kinds of stakeholders to form an unlikely support coalition under the banner of market integration. Mügge (2010) analysed capital market regulation in the decade before the crisis and emphasizes the role of big banks in pushing and shaping these laws. A few powerful firms, he argues, were able to use the legislative process to manage their competition. Both authors stress that we need a more political interpretation of European market reform processes.

As part of post-crisis-era financial policymaking, the recent EU project of creating CMU has received considerable (academic, not public) attention. Criticism is voiced on different levels: One is concerned primarily with the narratives legitimizing CMU (Engelen and Glasmacher, 2018; Quaglia and Howarth, 2018). Another level of criticism expresses doubts about whether the official policy goals can be achieved, from reducing risk and increasing financial stability (Alexander, 2015), increasing employment based on a wrong benchmark of US capital markets (Ertürk, 2015), to closing the supposed financing gap for SMEs (Engelen and Glasmacher, 2016). Another strand of criticism has focused (implicitly) on input and ‘throughput’ legitimacy (Schmidt, 2013): Moloney (2016) illuminates the increasing importance of supranational regulators; Epstein and Rhodes (2018) also reveal a shift from national oversight to supranational institutions, as well as a shift from democratic control to market actors; and Dorn (2016) argues that CMU implies a partnership between public and private regulation, or what he calls cohabitation. Yet others have looked at Member State preferences and issues of unevenness on the continent (Quaglia et al., 2016). On a more fundamental level, CMU has been criticized for returning to pre-crisis dynamics, pushing for deregulation rather than learning crisis lessons and returning to more traditional banking models to make finance serve the real economy (Lemaire and Plihon, 2016; Pesendorfer, 2015).

Most studies have focused on one particular CMU element, namely the securitization package. The verdict is quite negative, from fears of an upscaling of a problematic housing-centred model of financialization (Fernandez and Aalbers, 2017), critiques of the new securitization label (Engelen and Glasmacher, 2016, 2018; Metz, 2018), the dangers of returning to shadow banking in the search for a single safe asset (Gabor and Vestergaard, 2018), public development banks’ leveraging of EU budgets (Mertens and Thiemann, 2018) and even analyses of policy narratives (Quaglia and Howarth, 2018) – all focus on securitization. All these analyses are crucial; however, by putting the spotlight on this one element, many other policy proposals that are part of the CMU agenda are not sufficiently scrutinized.

A recent special issue of Competition & Change (Volume 22, issue 2, 2018) set out to find a common theme in CMU. The concept advanced by the editors is ‘governing through financial markets’, defined as a mode of governance where policymakers attempt to achieve public policy goals by inducing other actors to move in that direction: ‘To govern through financial markets is to engineer and re-purpose financial instruments and markets as instruments of statecraft, with the goal of achieving economic policy goals at minimum fiscal cost’ (Braun et al., 2018: 4). Following Greta Krippner’s and Sarah Quinn’s analyses of the financialization of the US economy, the authors claim that the EU is now also following a strategy of ‘governing through financial markets’ because it finds itself in a similarly constrained situation, inclined by structural conditions (budgetary constraints and institutional veto points in EU governance) to use indirect, budget-neutral policy tools (Braun et al., 2018: 5). All contributors in the special issue adopt this notion, although they signal different degrees of scepticism of EU policymakers, which Braun et al. (2018: 14) conceptualize as a

spectrum of conceptions of the role of technocrats, which, simply put, tend to range from ‘benevolent problem solvers’ to ‘servants of capital’. … [T]he former view would imply taking at face value the Commission’s narrative about CMU offering the best available solution … [B]y contrast, the second view would imply that the Commission’s narrative is merely a smokescreen to obscure a different, hidden policy agenda, namely the preferences of financial market actors.

According to the editors, the truth lies right in the middle. The rest of the contributors vary in their location on the spectrum. However, the spectrum situating policymakers between benevolent problem solvers on the one side and servants of capital on the other does not sufficiently take unconscious bias into account as a third dimension. Countless studies on lobbying and policymakers have demonstrated that the EU increasingly relies on a ‘politics of expertise’ (Radaelli, 2017), creating bias through selective engagement with experts (Dür and Mateo, 2012; Eising, 2007; Van Apeldoorn et al., 2007); analysed revolving doors and regulatory capture (CEO, 2014; Veltrop and De Haan, 2014); and more concretely argued that neoliberal ideas and narratives persist in the EU (Cafruny and Ryner, 2003; Macartney, 2009; Schmidt, 2016b).

Furthermore, the concept of governing through financial markets might not be entirely appropriate for the EU, as there are important differences between the US and today’s EU, most importantly in political structure (a federal versus a multi-level system). It could also be questioned whether the EU has similar budgetary constraints in need of solving, or whether it suffers from a similar structural capacity gap, leaving Eurocrats with no alternative but to govern through financial markets. National governments are an integral part of the EU and hold considerable power in it, politically and financially.

Critical policy analysis distinguishes between the narrative level, which tries to construct legitimacy for the public, and actual policies and their effects. In order to avoid a conceptualization of policymaking as a straightforward, rational, problem-solving path, the present analysis was inspired by Carol Bacchi’s WPR approach.

Critical public policy analysis

The EU can govern in ways other than through financial markets: not only are there alternatives to what the EU is currently doing with its CMU project, but the reason that CMU takes the specific shape it does also deserves critical investigation. Essentially, CMU is justified by referring to output legitimacy, i.e. the projected future benefits (rather than input, i.e. participation of citizenry, or throughput, i.e. quality of governance processes) (Schmidt, 2013). As in the past, EU policymakers contend that this next step of deepening the Single Market will deliver on the decades-old promise of more jobs and growth resulting from deepening integration (Valiante, 2016), despite shortcomings in achieving these output projections in the past (Ruser, 2015). Also, an emphasis on output legitimacy coincides with a shift from democratic to technocratic decision-making, as it renders integration projects into a search for ‘the best’ technical solution rather than into a political process with different stakes and distributive effects (Schmidt, 2016a).

Some scholars have already studied the official narratives of CMU and concluded that they are not much more than a legitimization strategy, strategically deployed by the Commission to appeal to different populations (Engelen and Glasmacher, 2016; Quaglia and Howarth, 2018). It is common among critical public policy analysts to conceptualize government discourse as something to be deconstructed and problematized (Taylor, 1997). There is also some evidence that EU actors themselves are aware that their official CMU discourse is wrong or misleading – at least in part. One example is the admission by previous Commissioner for Capital Markets Union Jonathan Hill that the narrative surrounding the provision of financing to capital-stricken SMEs was just a gimmick to convince the public of the job potential of CMU plans (Pesendorfer, 2015: 207). Another example is the biannual Survey on the Access of Finance of Enterprises conducted by the European Central Bank (one of the biggest proponents of CMU), which shows that access to finance was never the top concern of SMEs since the first survey was conducted in 2009, and that especially since 2014/2015 (when CMU was launched), the other four pressing issues were considered more important.¹ In fact, demand (‘finding customers’) was continuously among the top, outranking all other issues, only recently overtaken by unavailability of skilled labour. The selective reporting of EU research by the Commission suggests that they strategically construct their narrative in a manner where only arguments and evidence in favour of their plans are disclosed.

In order to look beyond the purely narrative level, an approach is needed that problematizes and unpacks the policy proposals. Bacchi (1999, 2009, 2012b) developed an analytic tool for critical public policy analysis called the WPR approach (WPR: What’s the Problem Represented to be?). This approach enables researchers to critically interrogate a policy proposal, starting from the premise that what is suggested as a solution (the policy) reveals something about what is thought to be problematic. Rather than working from the problem to the solution, WPR thus works backwards from the policy solution to its implicit (embedded) problematization. In Bacchi’s view, the WPR approach is particularly necessary nowadays, in an era of almost total hegemony of a problem-solving mode in politics that is exemplified by evidence-based policymaking in Western industrialized societies (Bacchi, 2012a, 2012b). Using the WPR approach allows analysts to step away from the presumption that the problems presented to them are fixed and uncontroversial starting points of policymaking, and enables them to think otherwise, to better understand the systems, relations, and conditions in which problem representations are produced. It also opens up spaces to think of alternative problematizations. Essentially, the approach consists of six (sets of) questions that help to problematize a policy proposal (see Box 1). Box 1.

The six questions of Bacchi’s WPR approach, adopted from Bacchi (2012b: 21)

1. What is the problem represented to be in a specific policy?

2. What presuppositions underpin this representation of the ‘problem’?

3. How has this representation of the problem come about?

4. What remains unproblematic in the problem representation? Can the ‘problem’ be thought about differently?

5. What effects are produced by this representation of the ‘problem’?

6. How/where has this representation of the ‘problem’ been produced, disseminated, and defended? How has it been (or how could it be) questioned, disrupted, and replaced?

WPR builds on older work on the social construction of social problems and on poststructuralist and Foucauldian theories. In particular, it uses Foucault’s notion of problematization, enabling us ‘to demonstrate how things which appear most evident are in fact fragile and that they rest upon particular circumstances, and are often attributable to historical conjunctures which have nothing necessary or definitive about them’ (Foucault in Bacchi, 2012a, 2012b: 2). The implicit assumptions, deep-seated conceptual logics, and more generally forms of knowledge underpinning specific problematizations need to be scrutinized.

CMU is a very broad and evolving project that is not contained within any single document. Anyone attempting to analyse and represent the project as a whole must therefore delve into a multitude of documents. This paper is primarily based on an analysis of EU Commission publications, as these are the official starting point in each EU policymaking process. In theory, since the Commission takes the initiative in EU policymaking, these documents should reflect only the official position of the Commission, which has the mandate to act in the interest of all Europeans. For the purpose of this paper, several key Commission texts were analysed in detail. They are key documents in that they are always referred to when it comes to CMU; even the documents themselves cross-reference. Four of the documents are building blocks of the CMU project (European Commission, 2015a, 2015b, 2016, 2017), and two are precursors of it (European Commission, 2013, 2014). The documents can hardly be analysed meaningfully in isolation, though. Therefore, the following analysis triangulates the evidence gained from the analysis of the key documents with many pieces of news coverage, blogs, think tank documents, lobby documents, reports, official statements, press releases, official documents, legislative proposals and relevant speeches and conferences in Brussels that I attended between 2016 and 2019. Later, the analysis was also triangulated with interview data from 19 respondents, which was generated between November 2018 and June 2019. These semi-structured interviews were conducted with six respondents from official authorities – mostly the Commission – six respondents from civil society organizations and seven financial industry representatives.

CMU framing

All key Commission documents share much of their framing. If there is one thing that unites the narratives of all six documents, it is the claim that the proposed plans are made in service of growth and job creation, through increasing Europe’s competitiveness and investment levels. The first sentences of each of the publications are compelling evidence (see Box 2). Box 2.

The first sentences of the selected Commission documents

2013: ‘Europe’s pressing challenge is to put the EU back on the path of smart, sustainable and inclusive growth, creating jobs, building on its areas of competitive advantage and, thereby, enhancing its competitiveness in the global market place’.

2014: ‘My first priority as Commission President will be to strengthen Europe’s competitiveness and to stimulate investment for the purpose of job creation’. [Juncker citation]

2015a: ‘The Commission’s priority – Europe’s priority – is jobs and growth’.

2015b: ‘The Commission’s top priority is to strengthen Europe’s economy and stimulate investment to create jobs’.

2016: ‘The Capital Markets Union (CMU), part of the third pillar of the Juncker Commission’s Investment Plan for Europe, is essential to delivering the Juncker Commission’s priority to boost jobs, including youth employment, and growth’.

2017: ‘The Commission’s top priority is to strengthen the EU economy and stimulate investment to create jobs’.

According to the Commission narrative, financial integration is the mechanism that will achieve their objectives. A realized Capital Markets Union, as the name suggests, would mean an elimination of all the ‘barriers’ currently contained within the markets, making these markets at once deeper and more efficient, effective, integrated and thus more competitive. The newly unified, competitive markets would lead to both a lowered cost of capital – in turn attracting more investment – and easier access to financing, allowing firms and entrepreneurs to innovate, scale up, and grow their businesses. So goes the narrative in all key documents.

It would then be logical to expect from CMU that it entails a harmonization of the relevant national laws and that supervision and enforcement are centralized, leading to a situation where investors and borrowers all over the EU access the same financial market under the same EU law. These types of action would be characteristic of an EU integration agenda and likely go far in achieving many of the desired results. However, a harmonization of financial regulation governing capital markets is not what the CMU policies focus on. The integration narrative that the Commission emphasizes bears little resemblance with the actual policies that are suggested. This is not to say that there are no market integration elements. However, a large part of the policies cannot be explained by this narrative. Therefore, we need to look at those policy solutions, and critically interrogate what problematizations are embedded in them and what issues they address.

The initial 2015 Action Plan on Building a CMU spelled out 33 actions. By spring 2018, the actions that had been taken included the reviews, calls for evidence, studies, and assessments. Concretely, these actions took the form of public consultations, the creation of EU expert groups (to work on reports), public hearings and calls for tender.

Of much higher importance – due to their legal ramifications – are those policy actions that take the form of legislative proposals. By 2018, the Commission had tabled 13 proposals (10 Regulations, five Directives). A majority of these legislative proposals do not stem from the original 2015 Action Plan, but from the 2017 Mid-Term Review. The Juncker Commission concluded its mandate after the regular five years in 2019. In the last couple of weeks before the European Parliament elections, many ‘political agreements’ were made between the European institutions in last-minute trialogues in order to lock down the remaining open legislative proposals. In the end, a broad agreement for most proposals was reached, but two remained open. Taking a closer look at the texts about CMU, a pattern emerges of types of policy actions that are repeated in various proposals. These policy solutions might be summarized in two mechanisms, namely (1) preferential prudential treatment, i.e. easing of the prudential rules specifying the capital adequacy, reserve requirements, and leverage ratios for financial institutions; and (2) incentivizing certain financial products with public funds. Such policy actions are emblematic of a financial market deregulation philosophy, where boosting financial markets supposedly will help the rest of the economy: a finance-led growth model.

Pattern 1: preferential prudential treatment

Prudential requirements determine the amount of capital, liquidity, and leverage that banks and other financial institutions must hold. These rules thus serve to absorb shocks and strengthen the resilience of the financial system by ensuring that banks and other financial institutions do not collapse in times of financial market volatility. Prudential rules became stricter after the last crisis showed that they had been insufficient. Since then, the prudential regime has already been changed a few times. The Basel Committee on Banking Supervision’s latest regime is the Basel III framework for bank capital adequacy, leverage ratios and liquidity, and has been implemented in the EU as the CRD IV/CRR package (EU Directive 2013/36/EU and EU Regulation 575/2013). For insurance firms, such a prudential framework with similar goals exists as well and is called Solvency II (EU Directive 2009/138/EC). Together, CRD IV/CRR and Solvency II form the prudential regime in the EU. A part of the rules is harmonized and another part leaves some discretion to Member States as to how they transpose the rules into national law. Prudential rules are a core issue for banks’ interests representatives. Lowering requirements or creating exceptions benefits banks. As insurers become ever more important on capital markets, loosening these rules becomes increasingly central to them as well.

Policy solution 1 – reducing prudential requirements – is embedded in many proposals that are part of CMU. Rules were amended to exclude certain categories or define a different treatment for them. Regarding CRD IV/CRR, amendments were made to encourage investment banks to invest in qualifying infrastructure projects and in infrastructure corporates, to exempt the entire credit union sector of Member States from the CRD IV/CRR prudential requirements, to favour loans to SMEs in capital treatments, and to specify lower prudential requirements for STS (versus other) securitizations. Also, agreements were reached to give preferential capital treatment to products qualifying under the new EU-covered bond label and to give preferential prudential treatment to certain types of investment firms. Regarding Solvency II, amendments were made to reduce capital requirements for insurers investing in European Long-Term Investment Funds, directly in infrastructure projects, later also in infrastructure corporates, private equity and privately placed debt and to distinguish investment firms from banks. In effect, all these amendments mean that certain investment classes become ‘cheaper’ for investors and that financial actors can increase their leverage. The other side of the coin is that there is more risk in the financial system, or, to put it differently, that there are less buffers to absorb shocks.

The Commission does not explicitly address this, and instead frames the reduction of prudential requirements as calibration of post-crisis prudential rules, arguing for instance that ‘the detailed calibration of the new regulatory and supervisory framework must effectively enable and incentivise the financial sector to support the real economy’ (European Commission, 2013: 6, my emphases). From their perspective, the relationship between financial stability and growth is apparently a zero-sum game: ‘the potential trade-off between restricting liquidity creation to ensure stability and providing long-term financing for the real economy explains the need for appropriate calibration and progressive implementation of the rules’ (European Commission, 2013: 7, my emphases). One of the Commission’s priorities is to ‘enhance the proportionality in the regulatory framework to better balance financial stability and growth objectives’ (European Commission, 2016: 7). Concretely, the logic is that after the crisis, prudential rules were made unnecessarily strict so that they now hamper growth (see also Hill, 2014). Recalibration serves to ‘better reflect the true risks’ (European Commission, 2015b: 5) and ‘affect the appetite of … investors’ (European Commission, 2015b: 20). Effectively, this means that some post-crisis increases in prudential requirements are now being rolled back.

These efforts to expand financial markets come at the cost of the public. With the reduction of prudential rules that are supposed to allow financial institutions to manage their risks and continue to function even in moments of economic turmoil, financial market actors can increase their speculative activities. Through the amendments, all kinds of exceptions and special asset classes subject to different treatment were established in order to make certain investments (long-term, infrastructural, high-growth potential such as SMEs, venture capital, business angel, sustainable, etc.) more attractive to investors. The Commission would argue that the measures are supposed to lead to increased investment in these types of desired categories, helping to ‘fund growth’, i.e. fund innovative new businesses, green technology, public infrastructure like broadband, and other things that Europeans need. We cannot know whether investment in these asset classes will increase. Financial institutions already holding such assets could also use their newly won capacity for any other investment or activity. Furthermore, the creation of new investment classes (with favoured prudential treatment) as legal form can be achieved by ‘relabelling’ existing funds and asset classes rather than creating ‘new’ funds.

Pattern 2: incentivization through public support

The second mechanism comes in many different shapes and forms, from subsidy-type contributions to public-private funds to more classic tax cuts.

Mertens and Thiemann (2018) focused on the role of public investment banks in the EU and the EFSI fund in particular: a different aspect of the Investment Plan, closely related to the CMU project. They describe various manners in which the European Investment Bank (EIB) leverages EU budgets through different risk-sharing constructs, such as public guarantees and the acquisition of junior (i.e. riskiest) tranches of securitized loans. There has been a shift towards financial engineering of more complex products and the mobilization of private funds not just for the refinancing of public development banks but also for the financing of the projects those banks promote, including public goods such as infrastructure. An (in)famous example of the types of risk-sharing devices is the public-private partnership (PPP), which in many cases has proven problematic (Hodge and Greve, 2007). Other examples of the new risk-sharing devices are various ‘investment platforms’: special-purpose vehicles where small and cross-border projects are bundled and structured and in which some kind of risk-sharing or co-financing agreement is made (Mertens and Thiemann, 2018: 11). What all these arrangements do concretely is to attract private investors to certain investment projects or classes by taking parts of the associated costs and risks from private investors into public hands.

From the Commission’s perspective, the ‘increasing use of financial instruments … can play an important role in increasing the impact of EU spending, by further leveraging and catalysing private long-term financing’ (2013: 8). Also, tax incentives are ‘justified when the social return to an investment is higher than the private return of the investor and therefore investment levels are below the social optimum’ (European Commission, 2013: 14). The framing shows that the Commission, considering itself above politics, does not look at such measures in terms of their distributive justice but in terms of their potential aggregate effect on the economy. The civil servants involved in writing the CMU plans are mostly economists and lawyers by training; the accompanying analyses and justifications for CMU policy plans (Staff Working Documents, economic analyses) demonstrate that.

Looking at CMU, instruments similar to those described by Mertens and Thiemann (2018) can be found. One example is the pan-European Venture Capital Fund(s)-of-Funds Programme called VentureEU, where EU budgetary support will be used to attract institutional investors (European Commission, 2015b: 5, 2016: 3). VentureEU is an element explicitly introduced under the CMU agenda and, as such, should be separate from other parts of the Investment Plan. However, if we look into how VentureEU works precisely, we find that it actually consists of existing EU funds, to a large part also the EFSI fund and capital provided by the EIB (exactly as analysed by Mertens and Thiemann). As such, some of the elements that are explicitly promoted as CMU elements overlap with other, already existing EU funds, programmes, initiatives, etc. Some of the forms of incentivization of financial products with public funds as described by Mertens and Thiemann can therefore also be found in CMU elements, as the projects (CMU and Investment Plan) are closely linked and the line between them is very blurry.

But under CMU, we find additional, concrete manners in which this policy solution is operationalized: one is present in the proposal for a Pan-European Personal Pension (PEPP) Product (European Commission, 2013: 13). Not only does the Commission explicitly encourage Member States to grant the new PEPP products the ‘most favourable tax treatment available to their [private pension products]’.² It also designed the PEPP legislation in a manner that allows PEPP providers to circumvent national authorities’ prerogatives to set taxes by tailoring PEPPs in national compartments, which then have to be treated equally to national personal pension products under the national treatment principle. What it means concretely is that all citizens finance the incentives given only to some, namely to those who have the capital to save for old age (while others rely only on state and employer pensions but still have to finance the subsidies for wealthier citizens). Another example is the Common Consolidated Corporate Tax Base, which aims to lower taxes for equity (to have similarly low taxation for debt and equity). The Commission is also promoting ‘best practice’ in national tax incentive schemes for venture capital investment in SMEs and for start-ups, which means it advises Member States to implement tax cuts. Yet another example is the variety of ‘investment platforms’ and new Alternative Investment Funds such as ELTIF, EuVECA, and EuSEF that benefit from public funds.

Incentivizing financial products with public budgets is an issue at least as political as the reduction of prudential requirements. In this mechanism, an investment becomes more attractive to a private investor because a considerable amount of risk/cost is shifted to the public. In other words, the costs are equally shared by the public, but the rewards can only be reaped by people who have the means (capital) to invest. Just as the prudential easing was indicative of a deregulation agenda, so are the classical instruments of the tax cuts, tax incentives, and subsidies which were bundled in this second policy mechanism. For the sake of market integration, they were not necessary.

In sum, looking at the various CMU elements, certain ‘policy solutions’ keep reappearing in the documents. The direction of the trend is always the same: lower prudential requirements for financial firms, lower taxes, lower risk for private actors (by socializing parts of the risks). Thinking backwards with the WPR approach – from ‘policy solution’ to embedded problematization – the implicit problematization is that pre-CMU rules were considered too strict. The next section will dig deeper into perceptions of the Commission by triangulating the findings with the interview data that was generated subsequently.

The politics of CMU

What emerges from the systematic analysis of the policy proposals and other documents is that there is a common dynamic running through many of the different CMU elements. Both mechanisms that I illustrated, I argue, amount to an EU-led effort to expand financial markets at public cost. For the first mechanism, the cost takes the form of increasing systemic risk by allowing financial actors to increase their leverage, making future crises more likely and severe. In the second mechanism, the expansion of financial markets is achieved with the help of public funds. Here, the public (budget) is involved much more directly, namely, to pay for the incentives given to investors. Whether these take the form of public guarantees, co-financing schemes, first-loss tranches, other risk-sharing arrangements as in the various ‘investment platforms’, credit protection for loans, or tax reductions (e.g. by ‘promoting best practice’ in national tax incentive structures for venture capital and business angels), they all share the characteristic that private investors profit from the public, but not vice versa.³

Taken together, both policy solution mechanisms and their common dynamic of an EU-led effort to expand financial markets at public cost are at odds with the official narrative. The financial integration – or creation of a Union – that is suggested as the goal in the official narrative and the name of the project do not feature prominently in the actual policy proposals. Where a logical deduction from the official narrative surrounding the integration of fragmented markets would mean that the EU should harmonize national regimes, there is little evidence for such market integration elements.

The argument that the notion of CMU is misleading was confirmed during interviews. Without being prompted, multiple respondents pointed out that the name ‘CMU’ was not an adequate reflection of the policies it entailed. They confirmed that CMU elements would never add up to an actual Union because of insufficient harmonization. They explained that during the unfolding of the crisis in Europe, national governments and the EU were in firefighting mode, making sure neither the financial sector nor EU Member State budgets failed. When the emphasis of the financial crisis in Europe turned to public debt, the idea of a Banking Union was born. According to respondents, it was at the time of creating a Banking Union that the idea of a complementary project for capital markets emerged. At first, it was supposed to be called Capital Markets Action Plan. But in the Commission, they thought that Capital Markets Union sounded better; as a complement to a Banking Union. Interviewees from the Commission argued that only the first building blocks for an actual Union had been laid now, and some even mentioned that there was talk of rebranding (changing the title of CMU) because of the clear inadequacy of the name.

The analysis of CMU policies revealed that some small barriers on financial markets are being removed, but most of them remain intact. In some areas, there are now European labels where they did not exist before, but they are not harmonized but rather added to the existing 28 (27) national regimes. Creating a new label is entirely separate from and keeps intact all other regimes. Many of the measures do not counteract the significant room for manoeuvre that national authorities and supervisors have. Important policy areas for integration, such as taxation and insolvency regimes, remained untouched by CMU (given Member State resistance). The point is that CMU actions will likely go much further in financializing EU economies (expanding financial markets – at public cost) than in integrating capital markets.

The respondents from within the Commission see CMU as a list of clear, technical adaptations to improve capital market efficiency. In the interviews, Commission officials kept referring to recent research and studies (mostly economic) to demonstrate the legitimacy and necessity of their arguments and plans, i.e. the benefits of integrated markets. When asked, respondents easily admitted that all elements entailed in CMU were tried before at different times but failed. CMU was but a new attempt at many little reforms that had been in the making for years, some even decades. Respondents in the Commission felt that the financial sector had been brought back under control and that the crisis chapter was closing when they launched CMU. They refocused on growth. Given the increasingly strict budgetary frameworks in the EU, states had little leeway for investment. And Commission officials – not having their own budget for public investments – became convinced that the way forward was through capital markets.

Overall, the interviewed Commission officials favour integration, harmonization, Europeanization. They see themselves as rational, above-politics experts, who practice evidence-based policymaking. When it comes to the market, they play the game of economic efficiency. They do not consider it their role to shape markets, or to question who might win or lose. To them, this is the arena of politics. While knowing about the resistance to integration, they consider it their role to keep pushing and to find opportunities for institutional change. Respondents explained that they had been quite ambitious in some of the CMU proposals – also because of the surprising amount of economic governance Europeanization that was implemented in the early post-crisis years – but that many of the proposals failed. A political agreement was hatched in last-minute trialogues for most files, but most of the integration elements in them had to be cut during this process.

Most interviewed Commission officials spoke negatively about Member State resistance to financial integration. In their view, Member State governments who resist (elements of) CMU are either against Europeanization in general (=irrational), trying to protect the growth created by their ‘anachronistic’ (i.e. closed, non-globalized) financial systems (=backwards), or under pressure from big national financial actors who fear increasing competition in their territory (=pressured). No arguments against financial integration had any real legitimacy for the Commission respondents.

Finally, the interviews confirmed that people in the Commission carefully craft their narratives for different audiences and come up with a political strategy to realize their agenda, as described by Jabko (2006) in the past. Respondents from within the Commission talked of ‘the marketing’ of CMU, of ‘tailoring’ messages to Member States with different interests, of how the next Commission ought to be ‘even more pedagogical’ in its approach, agreeing to quantifiable objectives at the highest level so that reforms could more easily be ‘pushed down to the Ministries’. One Commission official felt prompted to explain the power structure in trialogues by drawing and explaining a game-theoretical pareto efficiency graph during an interview. Commission respondents were quite reflexive about how they use critical junctures to push forward integration, step by step. They saw an opening in 2014 and they took it. Even if many elements in the CMU proposals were cut, not all integration efforts were stalled. When there is resistance to rules, the Commission suggests something voluntary; when there is resistance to harmonization, they create a 29th (28th) regime, and so forth.

Conclusion

Extending mostly case studies of elements of the CMU agenda, this article set out to discover commonalities among the various policies and to see whether the critiques levelled at them could be generalized across CMU. As described in the literature review section, scholars criticized the CMU agenda for repeating past mistakes and returning to pre-crisis models of financial regulation, for its post-democratic governance mechanisms, and for making big claims about future effects that are unlikely to be achieved. I have demonstrated that, indeed, post-crisis rules are being relaxed, indicating a shift to pre-crisis financial regimes. There are two policy mechanisms that reappear throughout the project: the lowering of prudential rules and various forms of incentivizing financial products with public funds. Neither of these mechanisms remove national barriers or integrate capital markets in any way.

Why consider CMU a case of EU-led financialization? Following Lai and Daniels (2015) definition of state-led financialization, the state actively and strategically mobilizes firms and institutions to co-produce the conditions resulting in increasing financialization of economies and firms. It is EU-led in the sense that the EU actively and consciously consults with stakeholders (see also Quittkat and Kotzian, 2011), mostly financial market actors, and co-produces with financial firms the conditions (policy plans) that will have the effect of further financializing the economy at public cost. EU-led financialization does not imply intent. It only implies that financialization is an effect of a policy project led by the EU. CMU is also EU-led in the sense that the financialization effects are not the result of uncoordinated, spontaneous activities by individual consumers or market actors, but the result of political-administrative decisions and rules, which are negotiated and could be challenged (Nölke et al., 2013).

The special issue on governing through financial markets argued that ‘the EU policy-making state is increasingly using the market for governance purposes’ (Braun et al., 2018: 3). I contend that if the EU is indeed trying to achieve public policy objectives such as job and growth creation through the CMU, then it is failing at governing through financial markets. By studying the actual proposals, in particular the parts that the Commission does not address itself, and considering their likely effects, it seems more accurate to argue that CMU serves market purposes rather than governance purposes.

The dream of more integrated capital markets has lived in the Commission for decades. Interviewed Commission officials favour more integration and view it as not only economically rational but also self-evident. However, they face resistance, mostly in the Council. To them, this resistance stemmed from certain national governments and financial institutions who fear that integration will bring competition into their territory, where they now enjoy a comfortable position. Because of this perceived irrationality, Commission officials strategize to exploit any windows of opportunity that may arise for financial integration.

After much success on the Europeanization front as far as banks and economic policy after the crisis are concerned, the Commission’s ambitions in their CMU proposals were relatively high. Towards the end of their mandate, only a small minority had been adopted. Completing legislative files before a new legislative period is a matter of symbolic success, however, and so the Commission started to compromise more and more on its integration elements in order to achieve a ‘political agreement’ in trialogues. In the first half of 2019, the disappointment among CMU-interested people in Brussels was quite high; there was talk of ‘failed CMU’ and having to ‘go back to the drawing board’ (as evidenced in interviews and discussions at public events).

The CMU project (2015–2019) can be looked at as a case of (mostly failed) financial integration. However, this article tried to demonstrate – both to EU and financialization studies – that there is something to be gained from applying a ‘politics of financialization’ lens. While the policy narrative emphasized integration, knocking down barriers, efficiency, and economies of scope and scale, there are recurring elements of financial market deregulation that are neither addressed in the narrative nor explainable by referring to integration. These recurring ‘policy solutions’ will have the effect of further financializing European economies.

The two processes – integration and financialization – can be separate. In practical terms, they have tended to go hand in hand in Europe. The asymmetrical European integration of the past was no coincidence but the result of the EU’s institutional and decision-making architecture and national governments protecting their dominant industries. The same architecture is still in place blocking all kinds of real integration efforts (an actual harmonization of regimes is entirely unrealistic at this point). Given these restraints, the Commission has little legal wiggle room. When the Commission’s ambitions to further Europeanize capital market regulations were met with resistance, the final outcome was a compromise that entailed little Europeanization, but quite some deregulation. Knowingly or not, by creating CMU, the EU is contributing to further financialization of European economies through expanding capital markets at the risk and cost of the public.

For critical observers of past decades of European (financial) integration, the return to EU-led financialization after the crisis-firefighting mode may not come as a surprise. They have argued that the EU has primarily focused on the market and benefitted economic actors and elites in the past. This asymmetrical integration is again at play in CMU, where the institutional architecture and some Member States and financial institutions’ resistance to Europeanization led to a compromise that entails little integration, but will lead to more financialization.

This case study certainly evidenced the political strategizing of the Commission (see Jabko, 2006), but it does not allow for an analysis of the origin of the Commission’s agenda. Whereas in Jabko’s study of the 1980s and 1990s (2006: 5), the ideas originated in the Commission and subsequently spread and changed, Mügge’s (2010) study of the late 1990s and 2000s until the crisis emphasized the role of big banks who transformed their private interests into public objectives. At least for the securitization element of CMU, the latter analysis seems to be more adequate for the current era (see Metz, 2018). However, whereas for the pre-crisis period, some financial institutions were able to use their power to Europeanize regulation, some of the evidence from this study (interview data) suggests that now, some firms are able to block integration, especially through Member States, for fear of competition.

It remains to be seen how the ‘political agreements’ reached on most CMU files at the end of the last Juncker Commission will be realized and what their precise effects will be. The CMU policy project is continuing in this new legislative period as well. Future research should continue to follow the project and more systematically investigate the interests at play in the policymaking process. The role of national governments and dominant national and international financial institutions in affecting integration, in particular, deserves critical attention.

Footnotes

Acknowledgements

I would like to thank David Bassens and Michiel van Meeteren for their continuous feedback and input. I also want to thank Caroline Metz, Laura Deruytter, Maëlys Waiengnier, Deborah Lambert, Laura Gutierrez Florez, Reijer Hendrikse, Hala El Moussawi, Guillaume Petit, my peer review group at the FinGeo Spring School 2018, the attendants of the IIPPE conference in Pula and the GCEG conference in Cologne, and the anonymous reviewers for feedback, useful discussions and overall support. Last but not least, I want to thank Marieke Krijnen for proofreading.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the FWO under Grant number G019116N.

ORCID iD

Nina Haerter

Notes

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