The Creation of a Common Market for Financial Services in the European Union
The Creation of a Common Market for Financial Services in the European Union
Of all the global achievements in the last 50 years, economic integration in Europe may be considered as the most notable of all. From a continent separated by war and differences in culture, Europe has proceeded to become an economic and political leader today. The formation of the European Union (EU), the accession of the 15 European countries to the Community, and the introduction of a single currency which were all deemed too difficult have all become realities, proving skeptics that there is hope for a united Europe. From the beginning, the idea behind united Europe centered on economic prosperity.
While conflicts in European countries were political in nature, it was almost always related to resource allocation. The signing of the Treaty of Rome in 1957 signaled the start of a gradualist approach to building the European Union as we know today. By preventing the establishment of monopolies, enabling the creation of common policies and granting commercial privileges to the colonies of the Member States, the Treaty of Rome put into motion the progressive economic integration which in turn, led to the longer term objective of political union in the continent (Ocana 2003).
The Treaty of Rome paved the way for the creation of a common market wherein persons, services and capitals can freely move across borders. Yet, despite the freedom of establishment set out in Article 43, the freedom to provide cross border services as provided by Article 49 and the free movement of capital espoused by Article 59 (European Council 1957), the focus in these early years were mainly on the abolition of tariffs and excise taxes. Following the recession in the early 1980s (also termed as eurosclerosis), the Heads of States have decided to complete the plans for an internal market.
As early as 1985 the potential of a common market for financial services was already recognized. In the 1985 White Paper published by the Commission of the European Communities, it said: “In the Commission’s view, it is no exaggeration to see the establishment of a common market in services as one of the main preconditions for a return to economic prosperity…the liberalization of financial services will represent a major step towards Community financial integration and the widening of the Internal Market” (Commission of the European Communities 1985). This is a fact that the modern day European Commission (EC) still believes in.
With more efficient allocation of capital, the Commission hopes to ensure long-term economic performance. More than 20 years after the publication of the 1985 White Paper, Europe is in economic turmoil. Critics have started pinpointing the flaws of creating the EU, and the Commission must again enumerate the advantages of an integrated financial market, as well as report on the developments aimed at this direction. What are the different steps made toward financial integration? What are the specific features of the liberalization program? What are the results achieved from these reforms?
These are just some of the issues which will be discussed in this paper. What does a Single Market Look Like? While so many legislators talk about the Single Market for financial services, very few actually understand what it is, and what can be expected from it. In sum, however, a fully functioning unified market allows buyers and sellers of assets to deal with one another, regardless of the location of their systems and infrastructure. It allows market participants, both the intermediaries (brokers) and the end users, to raise funds and profit in all Member States without fulfilling additional licensing requirements.
Financial institutions which legally operate in one Member State can open new cross border operations without needing to pay additional fees or acquiring new certification from the host country. These same institutions are also given access to all essential systems and infrastructures they will need to continue their operation (The Working Group in City of London 2000). All financial institutions duly licensed in their home countries can work as intermediaries in the financial market offering the same functions, products and services across all Member States.
In the same manner, infrastructure providers are free to offer their services in any country which belongs to the EU (The Working Group in City of London 2000). Needless to say, a Single Market is a venue for competition and innovation. It enables Member States to take advantage of the opportunities offered by the 27 countries and 480 million people in the Community without worrying about the risks. It allows Member States to take advantage of the benefits of free trade, while at the same time erecting safeguards that can protect their own economy from increasing volatility which is a major characteristic of globalization.
The Benefits of a Single Market According to the EC, the completion of a “single market [for] financial services is…a crucial part of the European Commission’s overriding objective of achieving more and better jobs in a more dynamic, innovative, attractive Europe” (European Commission 2010). Keep in mind that the financial market deals mainly with savings (whether individual or institutional) which can then be used as capital. With a Single Market for financial services, Member States can hope to achieve the following advantages (The Working Group in City of London 2000: pp.
7-8): • Improved allocation of capital, due to the lower transaction costs and higher market liquidity. • More efficient movement in the security market which allows savings to become investments. • More innovative financial systems which lead to a diversified (hence, a more stable) portfolio of investments. • More efficient financial transactions as brought about by the competition among financial intermediaries in the EU. • Increased opportunity to take advantage of the economies of scale.
In the 1985 White Paper, it was stated that in order for the internal market to become a possibility, firms and private individuals must have access to more efficient financial services. With open competition among financial institutions, they will be forced to reevaluate their processes so that restrictions to capital movements are kept to a minimum (Commission of the European Communities 2005). The White Paper also believed that more efficient financial transactions will reinforce the European Monetary System and ensure the stability of the exchange rate (Commission of the European Communities 2005).
Even in those early days, it was already known that the free movement of capital coupled with greater financial freedom will enable Member States to enact sound economic policies, hence, promote economic stability. In recent years, the need for a Single Market for financial services has become even more important. With the improvement in technology came the increased access to knowledge and information, which in turn affected strategic decisions and competition.
In order to survive a globalized economy, companies have to find more efficient processes so that they can take advantage of the economies of scale. And yet, even the creation of efficient processes will require capital. With lesser restrictions among EU countries, companies can now raise funds from any side of the Community. Aside from this, the high interest rates have led to the increase in the demand for high-yield securities and assets, but with the deceleration in productivity came the need to manage portfolios more actively.
Investors have become more wary and will not release capital without the assurance of profit. With a Single Market for financial services, the EU has provided stability in portfolios because of the increase in the number of investment tools available in the Community. A Single Market for financial services allows capital to flow smoothly because it provides investors an attractive market where there are more opportunities to pool risk, as well as improved chances to profit.
With the increase in the flow of investments in all financial institutions in the EU, businesses can have additional sources of capital which they can then use to expand their operations, and provide employment. The “achievement of the Single European financial market is the most crucial [factor] in creating the most competitive and dynamic knowledge-based economy in the world, capable of sustainable growth with more and better jobs and greater social cohesion” (The Working Group in City of London 2000: pp. 8).
For citizens, a single market for financial services meant that the capability to open bank accounts in any country in the EU, buy and sell shares in foreign companies, purchase real estate – basically to find an investment with the best return. On the other hand, for companies, it means the ability to invest (and own) other European companies and play a big role in their management. The financial market is a global industry where global players seek international markets which will give the best advantages in terms of cost, profit, flexibility and liquidity.
An integrated European financial market makes available a number of opportunities – from retail investors, to wholesale financial markets for global traders. Steps toward Financial Integration in the EU The move towards financial integration in the EU can be traced as far back as the 1970s with the release of the major directives in banking, insurance and investments. The first banking directive focused on the establishment of credit institutions within the Community.
According to this directive, all banks operating in the Community which have plans of establishing operation on another country must obtain authorization from the supervisory body of the host country. At the time, European Community (EC) banks were subject to restriction, especially in the range of activities they can perform. Many of these restrictions are listed on the General Agreement on Trade in Services (GATS). Keep in mind, however, that this directive has been issued in the 1970s while the similar legal framework from the World Trade Organization (WTO) was released only in the 1990s.
By 1989, a new banking directive was released. The second directive introduced a single banking license wherein the bank’s home country is responsible for checking the financial institutions’ overall solvency, and the fulfillment of minimum capital requirements. Once the bank was licensed in its home country, it can then expand its operations to other Member States without completing separate authorization requirements (Pasadilla 2008: pp. 3). Aside from these two directives, other directives affecting banking policies were released.
Some of them were involved the harmonizing of accounting rules, the removal of exchange controls, the setting of minimum capital requirements, and the definition of banking activities. Integration in insurance and investment mirrors the same steps made in banking. Major directives were also released, each one amending the previous. The first directive in this sector paralleled the first banking directive wherein authorization procedures were outlined. In a subsequent directive, the home country control was enhanced and certain supervisory provisions were specified.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 26 September 2016
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