European Central Bank President Christine Lagarde said the European Union (EU) needs a “European SEC” that will replace the region’s currently fragmented supervision with a more top-down approach like that of the United States Securities and Exchange Commission.
This is necessary because the EU faces capital markets challenges on the scale of those faced by the U.S. when it was working to build railroads that would boost the nation’s economic potential, Lagarde said Friday (Nov. 17) in a speech delivered at the European Banking Congress in Frankfurt, Germany.
The EU is facing “a new set of efforts that will require a generational effort to finance,” and this can only be achieved with a new capital markets union (CMU), Lagarde said in the speech.
These efforts are needed to confront deglobalization that is seeing the global economy break up into competing blocs, demographic changes that are leading to a continuing decline in the working age population in the euro area, and the need for decarbonization to offset climate change, Lagarde said.
Addressing these challenges will require a “massive investment” in new supply chains, digital technologies to boost productivity and a green transition, she added.
The European Commission (EC) estimates that the digital transition will require 125 billion euros per year until 2030, and the green transition will need 620 billion euros per year, Lagarde said.
“Just like the United States in the 19th century, it is clear we cannot rely on our existing framework to finance this investment,” Lagarde said in the speech.
Europe’s capital markets remain fragmented, with its bond markets three times smaller than the U.S. and its venture capital five times smaller, she added.
This has left small- to medium-sized businesses (SMBs) in the region unable to access the financing they need, and banks unable to finance riskier loans, Lagarde said.
“Creating a European SEC, for example by extending the powers of ESMA [European Securities and Markets Authority], could be the answer,” Lagarde said. “It would need a broad mandate, including direct supervision, to mitigate systemic risks posed by large cross-border firms and market infrastructures such as EU central counterparties.”
Credit standards have tightened across Europe, reflecting an uncertain economic environment, PYMNTS reported in February.