Faced with weak growth, high unemployment and rising debts in many countries, the European commission is trying to shift the debate away from the choice between 'austerity' versus 'more public spending' towards the question of how to attract more private investment.
In principle, most political groups - both on the left and the right - adhere to this goal. Commission president Jean-Claude Juncker's investment plan, as well as the new proposal for a capital markets union (CMU), should be understood in this respect.
It is estimated that the EU depends on banks for 75 per cent of its funding to help companies grow, causing capital to be very vulnerable to changes in bank balance sheets in times of financial turmoil. The goal of the CMU is to help companies, especially small and medium sized enterprises (SMEs), in raising cash from other sources in Europe.
"Improving and adapting regulation so that institutional investors can more easily back the real economy is particularly pertinent when it comes to very long-term investments"
We don't need a top-heavy centralised project to do this. Luckily, the green paper published by European financial stability, financial services and capital markets union commissioner Jonathan Hill last month focuses on removing obstacles rather than drafting new legislation. It will then be up to investors to do the rest.
Member states all have different regulatory frameworks and cultural traditions, making attempts to legislate in this area very difficult. Europe cannot simply copy the US model, where only 35 per cent of businesses rely on banks for financing.
Commissioner Hill is therefore working on breaking down barriers and cutting red tape, for instance, by reviewing the prospectus and transparency directives. He hopes to encourage private placements in the bond market and make it cheaper for small companies to be listed on stock markets.
The green paper focuses on what the real problems are for companies attempting to acquire funding. This has led the Financial Times to refer to Hill as 'a plumber', but I believe he is right. Many of the issues blocking pan-European capital markets are tricky and technical - often unintended consequences of regulations that were implemented to achieve other objectives.
That is why the commissioner should be praised for deciding to review close to 40 financial regulation measures introduced under the previous commission.
Improving and adapting regulation so that institutional investors can more easily back the real economy is particularly pertinent when it comes to very long-term investments in areas such as infrastructure. Improving access to financing for SMEs is another important goal.
In the aftermath of the financial crisis, small businesses struggled significantly when trying to access financing, more so than larger companies. Improving credit information would help tackle this problem, as would developing a common minimum set of comparable information for credit reporting and assessment.
The term 'capital markets union' seems to refer to typical European institution-building. Wouldn't it be better to rename the initiative, as has been suggested by think tank open Europe? A 'single capital market' or a 'single market in capital' would be much better suited to our ambitions, because our aim must be to help finance businesses in Europe.
Combined with the necessary structural reforms and fiscal consolidation in the member states, we could boost the competitiveness of European economies, making Juncker's investment plan obsolete in just a few years' time.