Liberalising the free flow of capital in the European Union : legal considerations in light of the “Green Paper on building a Capital Markets Union”

Abstract

Capital markets in the EU remain fragmented and relatively underdeveloped, as they are organised on national lines. Throughout their evolution, national capital markets have developed irregularly, with insufficient cross-border investments. Although considerable progress has been made in developing a true single market for capital, the free movement of capital, specifically cross-border investments remain impeded by a number of deep-rooted and long-standing obstacles. The nature of the obstacles in question is cultural, legal and economic, which tend to range from divergences in national laws regarding securities law, company law and corporate governance, and insolvency law, to those in relation to market infrastructure. Traditionally, European businesses have been more reliant on bank financing, with bank lending playing a larger and more significant role in funding the corporate sector than capital markets. This heavy reliance and the scarcity of alternative sources of finance are said to be significant features of the European crisis and obstacles to its resolution. In any case, deepening and strengthening the EUs capital markets will result in a number of benefits for all EU MS, businesses as well as citizens. Said benefits include greater diversification of funding and reduced cost of raising capital, particularly for SMEs; more integrated financial markets; facilitating the raising of finance through capital markets; and removal of barriers impeding cross-border investment. Therefore, in order to achieve these benefits, capital markets must naturally play a larger part in financing the economy, thereby lifting the burden bestowed upon banks, by reducing the percentage of bank lending. This paper aims to answer the following three questions; can a stronger CMU ease the flow of capital in the EU? What measures must be taken in order to achieve this objective? How can we encourage cross-border investments?