SPEECH/00/163
Mr Frits Bolkestein
European Commissioner in charge of the Internal Market and Taxation
The Lisbon European Council: a new stimulus towards the integration of European financial markets
Forum Financier Belge
Brussels, 4 May 2000
Ladies and gentlemen,
Thank you very much for inviting me to speak here today to this distinguished audience.
I welcome this opportunity to discuss with you the profound changes which are affecting financial services in Europe and worldwide. The speed of these changes is rapidly accelerating, driven forward by globalization, the Internet and e-commerce – all leading to fiercer international competition, greater market transparency and new ways of doing business. No sector of the economy is left untouched.
The challenge for the European Union over the next decade is to become “the most competitive and dynamic knowledge-based economy in the world”. It is a bold ambition. But these are precisely the words our 15 Heads of State and Government agreed to at the Lisbon Summit in March. The decisions taken at Lisbon constitute a sea-change in political and economic thinking that has created an exciting new stimulus for action. What they decided was perhaps the most forward looking series of plans for the European Union for a decade.
For the first time, we have not just a clear list of economic and social priorities but also dates by which a specific action must be completed. Progress towards these goals will be systematically reviewed each Spring at successive European Councils.
Best practice and benchmarking will be used to ensure that European standards match the best in the world. The Lisbon commitments for building the knowledge economy span the information society, furthering research and development, assisting small and medium sized companies, improving the single market, fiscal consolidation, helping education and training and modernizing social protection.
But at the core of the Lisbon strategy is the closer integration of Europe’s financial markets. Without a fully integrated financial services and capital market in Europe we shall be unable to release the economic opportunities that will underpin the Union’s new competitiveness. Because the cost of capital will remain too high and the yields on assets unnecessarily low. The availability of pan-European risk capital will be sub-optimal and the attractiveness of IPO’s limited. And the long-run pension problem will remain unresolved.
I should like to explore these themes. Firstly, by considering the forces acting on main market vectors. Then by exploring how appropriate action at a European level can help to stimulate and build the sort of financial markets we want. The political opportunity to move forward has never been better.
This is because - I scarcely need tell this audience - the European Union is enjoying the best macro-economic outlook for a generation. Economic growth this year is now forecast at over 3% and may improve further in 2001 as the productivity benefits of the New Economy accelerate in Europe.
The combination of the Internal Market and the Euro provides a powerful platform for continued growth, for price convergence and, by eliminating exchange risk, for stimulating investment. Inflation and interest rates are low. Our balance of trade healthy. Unemployment is also falling at a faster rate than we expected – with the information technology sectors leading the way.
In financial services, the markets are setting the pace. The banking sector, which is larger in Europe than in the US, is witnessing an unprecedented period of upheaval. Belgium has seen considerable consolidation as major players position themselves for further change and rationalisation. The choice is stark: either remain regional players in Euroland or integrate, win business Europe-wide and become global players.
Equity markets are also consolidating. The Euronext combination of the Paris, Amsterdam and, of course, the Brussels Bourses will have 1,360 quoted companies and a total market value of around 2.4 trillion Euros. The London and Frankfurt Stock Exchanges have also announced a link-up, which may also include NASDAQ, which has been seeking a European presence. And FESCO is reporting that about 20 new alternative trading systems have emerged in Europe outside the framework of traditional stock exchanges. In clearing and settlement we are also seeing profound changes and mergers to reduce drastically the back-office costs of trading in the EU, which are frequently estimated to be eight times higher than those in the US.
These market-driven developments underline the importance of the Commission’s work in reviewing our entire legislative framework for financial markets.
An equity culture is beginning to spread across the European continent as savers and investors are turning to more equity-based investments. In France, for example, the number of people holding equity-based UCITS increased by 40 per cent between December 1997 and May 1999. The number of new IPO’s is also increasing, with many but not all having an Internet focus. This is healthy.
So for many companies, capital market financing is beginning to replace bank-based financing. Corporate bond markets are experiencing rapid growth. In the past securities were issued mainly by large, highly rated companies. Over the last year, the average credit rating of European companies issuing bonds has dropped considerably, indicating a new appetite among investors for corporate debt, in turn reducing the cost of capital for European firms.
Consolidation of financial markets is good news for investors. It increases access to flexible capital, generates new savings opportunities, creates greater transparency and efficiency, with positive spillover effects for investor protection and confidence.
But the consolidation and integration of Europe’s financial markets has not gone nearly far enough. More needs to be done if we are to create a genuine single market in financial services.
There are still far too many barriers. Unnecessary and costly red tape damaging the supply of venture capital. Fifteen sets of consumer rules.
Vestiges of petty protectionism, often in the guise of calls for higher levels of consumer protection. Such fragmentation risks undermining all our efforts.
We already have the framework for change. It is the Financial Services Action Plan. The Lisbon summit has set the deadline of 2005 for its completion and a deadline of 2003 for measures in the area of risk capital.
There are three key objectives :
First – a single wholesale market for financial services.
Second – open and secure retail payments.
Third – State-of-the-art prudential rules and supervision.
(1)A single wholesale market for financial services
First, in regard to wholesale markets, it is essential that corporate borrowers can raise capital efficiently on an EU-wide basis. This requires a new and simple accounting strategy to simplify and enhance the comparability of financial information – helping investors and improving market transparency. The Commission will make a proposal along these lines in June. We want one set of rules for all listed companies.
It also requires a common legal framework for integrated securities and derivatives markets : A “single passport for issuers” to facilitate access to capital on an EU-wide basis for all companies wanting to list their shares on European stock markets, including SMEs. Again one set of clear prospectus rules for all companies seeking listing or capital on European financial markets. Complementing our accounting strategy approach. Our proposals will be ready this autumn.
Next – pension funds.
The average age of the EU's population is increasing. The ratio of people in work to retired people is declining – a percentage likely to decrease even more over the next 30-40 years. Today, four people of working age support each pensioner; by 2040 there will be only two. State pensions average ten per cent of Gross European Product but given the major demographic changes expected, unless there is change, this rate could increase to around 15 per cent by the year 2030.
One important part of the solution is to develop private pension funds in the EU - eliminating out-dated and inefficient quantitative restrictions on their investment choices. A Dutchman should be careful of what he says to a Belgian audience. But one example of good practice in this field is The Netherlands.
If all European Member States, in relative terms, had private pension funds as in The Netherlands, an extra 3-5 trillion Euro might become available in EU capital markets in little more than a decade. A mouth-watering prospect for capital markets and our long-run competitiveness. It would reduce the medium term pressure on public expenditure. Our proposals will be tabled before the summer break. And we are also working actively on the distinction to be made between retail and sophisticated investors; on market manipulation and on cross border collateral. It is a heavy agenda.
(2)Open and secure retail payments
Second, it is of course vital that consumers reap the benefits of an integrated European financial services market. This is why our second strategic objective is improving the retail side of financial services.
The retail agenda is about greater consumer choice in financial services and rigorous, efficient and fair consumer protection. Measures to aid consumers such as better information, awareness raising, strong prudential standards and simple access to out-of-court redress are integral and essential parts of the development of European financial services.
The hot topic at the moment in retail financial services is obviously e-commerce. We have only just begun to see the potential of on-line shopping and business-to-business trade.
Potential savings are enormous. Economies of scale mean new markets can be created where none existed before. There are some very difficult legal issues to overcome. The basic premise of the e-commerce Directive – now very near adoption – which should, all being well, be implemented by all Member States by the end of 2001 - is that service providers should be subject to “country of origin” rules.
However, there are some derogations to these principles – to ensure coherence with existing financial services legislation (notably collective investment schemes and insurance) but also to be in conformity with the Brussels and Rome Conventions covering the applicable jurisdiction and law for consumer contracts. In the end this will come down to a question of political choice and confidence. And the stark choice is this. Do we trust each other enough – on the basis of agreed Community rules and prudential standards - to allow the “country of origin” principle to govern all e-commerce for the provision of information society services, including financial services? If so, what must we do to ensure this happens? Do we have to harmonise aspects of consumer contract law and financial service products, for example, to build confidence? Or do we put in place a system of mutual recognition? These are major political choices. But what we must at all cost avoid is drifting along with fifteen different sets of rules, thus fragmenting European markets.
(3)Prudential rules and supervision
And now my third point. In order to realise our full potential we must improve financial stability.
This is why our third strategic objective is to ensure Europe has state-of-the-art prudential rules and supervision.
We are now trying to ensure that national regulators work more intensively together in order to strengthen their capacity to respond to cross-border problems and develop common approaches to matters of prudential risk in banking, insurance and securities markets. This is essential to enhance the soundness and financial stability of the EU’s financial systems. The long term structure of the supervision of integrated European financial markets is a fundamental question for the European Union – coming more and more to the fore as markets consolidate and merge.
Because markets are changing rapidly. Along with the changes in securities markets there is a clear trend towards financial conglomeration, blurring the lines between what used to be distinct financial activities. This has an impact on supervision. The ECB reports that since 1995, 251 new domestic groups engaged in banking, securities and insurance activities have come into being. In many Member States more than two thirds of banking assets are held by banks that are part of a financial conglomerate.
As financial services providers reorganise themselves across borders and across sectors, it is patently obvious that we need to overhaul our regulatory structures. Market pressure is arguing for one set of rules, applicable by all – with transparent, clear supervisory structures.
One of the major beneficiaries of all these changes will be small and medium sized companies – the lifeblood of the economy and the prime source of new jobs. Efficient, pan-European financial markets will spread financing options for them; facilitate capital raising; and encourage the development of risk capital because investors will be able to “exit” on liquid European stock markets and reinvest. For a powerful and dynamic European economy, our fast growing companies must have a European option to seek capital and list on a liquid exchange. That means the whole finance chain from seed capital to IPO must work. There is no secret. We shall be as strong as the weakest link in that chain. It is this dynamic that will be tremendously important for future job creation in the European Union.
Ladies and gentlemen.
To my mind, a fully integrated pan-European financial services market will lead to a higher quality of life for all European citizens. A large, more liquid capital market in Europe will create more investment, more growth, more innovation, more jobs and higher incomes.
I am committed to making this happen. I want your support – and I want to hear your views. The Lisbon European Council has set us a 2005 deadline. Its therefore time for action.
Thank you.
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