Failure to reform Europe’s capital markets will blunt the UK’s entrepreneurial edge

Hans-Ole Jochumsen
European Commission president Jean-Claude Juncker wants a “capital markets union” in Europe.

BRITAIN has long regarded itself as having a certain entrepreneurial flair that sets it apart from its continental cousins. And now it’s official. The recently released annual Global Entrepreneurship and Development Index placed Britain fourth in the world, and well ahead of its European neighbours.

The ugly truth, however, is that Britain’s entrepreneurial edge will be blunted without radical reform of our capital markets. Economic recovery will hinge on supporting new businesses and that means giving them easy access to efficient funding and affordable capital. To unlock their potential, SMEs and the capital markets must be united.

At the heart of the issue lies a troubling statistic: within Europe, stock market capitalisation was a mere 55 per cent of EU GDP in 2013, while bank credit to the private sector stood at 104 per cent of GDP. By contrast, the balance in the US was the opposite (136 per cent and 43 per cent respectively). Reversing Europe’s funding pattern must be a top priority for UK and European policymakers alike.

This European over-reliance on funding from banks is problematic for two reasons. First, it is unsustainable in a post-crisis world where, thanks to stricter capital requirements, bank loans are both scarcer and more expensive. Second, history shows that capital markets prove better handmaidens of growth. Research from the National Venture Capital Association in the US indicates that 92 per cent of employment growth in VC-backed US companies comes after they float on the stock market. More needs to be done to encourage IPOs. Initiatives like the recently-established European IPO task force will play a key role, but it is important that this programme is allowed to reach its full potential.

However, this is not just about equity and IPOs – Europe’s corporate bond market is also significantly smaller than it could and should be. This is as much a question of culture as anything else, so change will require commitment and incentives.

The UK’s Seed Enterprise Investment Scheme, which offers tax breaks for retail investment in riskier SMEs, is a case in point. Similar changes are being seen across Europe, especially in the Nordics, but it is not realistic to assume that local initiatives alone will serve the needs of all new businesses. An explicit and unified vision for capital markets reform, with a laser-like focus on growth and jobs, is needed across Europe.

The proposed financial transaction tax, which would pointlessly hobble our capital markets and only exacerbate current funding patterns, is symptomatic of this lack of overarching vision.

The Federation of European Securities Exchanges’ goal – to get EU stock market capitalisation up to 100 per cent of GDP by 2020 – could provide a starting point, but time is of the essence. Jean-Claude Juncker’s vision of a “capital markets union” in Europe, while requiring more clarity and definition, at least shows a political will to improve the current situation. And that’s the key, because without co-ordinated and substantial action now, European competitiveness will continue to wane, and Britain’s entrepreneurial spirit could simply evaporate into thin air.

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