22 Jan 2021
“European economic and financial system: Fostering openness, strength and resilience” – even to the seasoned EU observer the title of the most recent Communication from DG FISMA is unique, and… a bit of a tongue- and mind-twister. In short though: The paper is about EU financial sovereignty.
The timing of the publication, Tuesday 19 January, is one that will have surprised no one. Barely 19 days after Brexit had become a reality and around 19 hours before the end of what can only be called a rocky US transition, this was the opportunity for the European Commission to set out how the EU can reinforce its “open strategic autonomy” in an increasingly polarised world.
The agenda set out in the Communication is one that may at first glance not seem of direct relevance to our members at Invest Europe. Being private equity practitioners, the promotion of the international role of the euro, the strengthening of the EU’s financial market infrastructures and the improvement of the implementation and enforcement of EU’s sanctions’ regimes are unlikely to deprive even the most anxious fund manager of a good night sleep or half an hours care on the normally busy business days.
But a closer look – and this is why we at Invest Europe care - will show, that this may soon, as the high level wording and aspirations in the paper, drizzles down to concrete policies - matter to our members’ investment decisions. For one, the suggestion to enhance the EU’s foreign direct investment (FDI) screening mechanism by checking whether foreign takeovers might create extraterritorial effect of foreign sanctions definitely has the potential to make certain cross-border investments harder to make – on the other hand a uniform EU approach to FDI screenings could be, if done right, most welcomed substituting the arabesque pattern in the existing 16 national schemes (with possible more to come).
But what is perhaps most telling with this Communication is the perceived importance of putting “strategic autonomy” at the heart of the EU financial services policy in a post-Brexit world. While regulating financial services was always done with an eye on global affairs, this was first and foremost because of the risks of contagious market instability. Today the perceived risk is as much geopolitical as it is systemic.
Of course, the paper states that the EU is not willing to “rebalance” its relationship with third countries, including its former member, at the risk of undermining the competitiveness of EU actors and raising unnecessary hurdles to foreign investors and we profoundly agree to this approach. Nonetheless, we are cautiously weary with an added twist of pessimism, that we may soon expect that any future legislative revision - whether it is secondly of the securities market framework (MiFID), thirdly on the banking framework (CRD/CRR) or fourthly (God forbid!!) a reopening of the asset management directive (AIFMD) – being introduced with a mindset of “sovereignty before openness” which could open contentious debates in an unhelpful way on issues of delegation and of national private placement regimes.
As a global industry, we’re happy to take on the role of reminding the European Commission (and others) that open strategic autonomy and the ability to reap considerable local benefits from investments – like the excess of 3400 European companies receiving capital support from private equity in H1 of 2020 or the 10,5 million Europeans working in private equity backed companies* - does not exclude the need for global value chains. In fact, quite the contrary.
A strong Capital Markets Union will be best at delivering the local - European - growth, innovation and jobs we all want, if fund-managers are able to attract Asian, US and UK investors. And post-Covid recapitalisation efforts will only succeed if financial operators can make the full use of the Single Market.
*2018, see full report “Private Equity @ Work”
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