by GK Strategy 30th September, 2015
3 min read

Will the UK benefit from new plans to revive the EU’s capital markets?

While the UK is beginning to discuss its European future in earnest, the EU is grappling with the challenge of harnessing the full economic potential of the single market.

Free movement of goods and labour may have been achieved, but significant barriers exist to dampen the continent’s capital markets.  The UK’s EU Commissioner, Jonathan Hill is proposing to solve this through the creation of a capital markets union.

In launching the details of the plan, Hill has pointed out that despite similar sized economies, the EU’s equity markets are only half the size of the US.  When fully implemented in 2019, the union could see such markets deepen considerably, with private and venture capital funds at the forefront of the EU’s thinking.

A range of measures will make it far easier, and cheaper, to deploy capital across the continent. There will be incentives to invest in infrastructure and moves to make raising funds on the public markets simpler too.  If successful this could see tens of billions of pounds of extra investment flowing to innovative and growing European companies every year.

On the face of it, the UK with its global financial centre should benefit immensely.  There is, however, a considerable risk that the British public could force the UK out of the EU and away from this opportunity with opinion polling now showing narrow leads for those wishing to leave.

As with most other aspects of European policy, it’s very unclear what leaving the EU would mean for the UK’s capital markets and investment patterns. But there would be a real opportunity for the continent to develop the dynamism seen previously in the UK and especially in the US, while the UK slowly regresses into a bit-part player when it comes to backing new, innovative businesses.

Assuming the vote is held by the end of 2017, and the public votes to exit, there is then the question over which type of relationship the UK wants to have with the EU, how it will disentangle itself from those aspects of European rules it no longer wishes to abide by, what the impact will be on Scotland and then how to even create a timetable for separation.  There is even the prospect of a second referendum to decide upon this further question.

In any case, it would likely not be until 2019 at the earliest that separation begins to happen, just as the capital markets union goes live and other potential developments in the digital and energy markets take place.  In essence, the UK might be removing itself from the Union at exactly the moment when the latter’s policy priorities link more closely with those of British investors and businesses.

The question is to what degree David Cameron is considering these economic arguments in his renegotiation process, and whether the British media and public will be influenced by these considerations or whether a less rarefied campaign will be fought around issues of migration and sovereignty.  A lot depends on the internal dynamics of Labour and the Conservatives, both of which will be adjusting to Jeremy Corbyn’s leadership and an impending Conservative leadership contest.

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