How the outflow of investing means is caused by European bureaucracy

Het Financieele Dagblad, BNR Nieuwsradio
Erasmus School of Economics

In an article from Het Financieele Dagblad and a broadcast from BNR Nieuwsradio, a possible reform of the European capital market is discussed to make it greener and more attractive to investors. Professor of Financial Markets at Erasmus School of Economics Mary Pieterse-Bloem criticizes some of the statements made by ECB president Lagarde.

Each year, around EUR 300 billion departs the eurozone in quest of higher yields outside the currency union. Businesses utilise it to acquire foreign land or to construct new facilities. And investors such as banks and pension funds invest money in financial goods distributed around the globe. The reason for this loss of capital is because supply and demand are unable to match up. The reality that Europe is covered in a thicket of regional regulations comes into play here. If a Dutch contractor wants to promote a bond, he must adhere to a variety of Dutch rules. Due to the many hurdles, European money does not flow to the highest-yielding sectors, which implies that recruiting capital is more costly than it should be. Often, start-ups are forced to seek funding from US investors throughout their development phase, since European investors are averse to bids from outside their own nation.

The eurozone's transition

Christine Lagarde, President of the European Central Bank, thinks that the eurozone's move toward market financing will accelerate in 2022. She warned in a speech earlier this year that the transition to a sustainable economy may act as a stumbling block in the establishment of an integrated green capital market. If Europe begins establishing sustainable reporting criteria based on the Brussels-developed green taxonomy, establishes a European regulator for green financial products, and implements a unified tax treatment for investments in these products, a green capital market union will be formed. 'These efforts may therefore be seen as a propeller for the broader European capital market ambition,' Lagarde said.

Professor Pieterse-Bloem believes it will not occur: 'Yes, the intention is present. However, the oversight apparatus is so large that the left hand has no idea what the right hand is doing.' Thus, Pieterse-Bloem argues, Basel-IV requirements strengthen banks' shock resistance while also affecting their function as mediators between those seeking and those providing loans. Additionally, the process of bundling SME loans in order to sell them has grown too difficult and costly for banks, despite the fact that this is required to enable pension funds to participate. Individual loans are too inconvenient for those parties to disclose in their balance statements.

Professor
More information

You can download the full article from Het Financieele Dagblad , 13 December 2021, above.

You can listen to the full broadcast from BNR Nieuwsradio, 14 December 2021, here. 

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