Fiscal fault, financial fix? Capital Markets Union and the quest for macroeconomic stabilization in the Euro Area

Abstract

This paper argues that Capital Markets Union-the EU's attempt to establish a more marketbased financial system-is a result less of financial policymaking than of macroeconomic governance in a politically fractured polity. The current governance structure of Economic and Monetary Union (EMU) severely limits the capacity of both national and supranational actors to provide a core public good, macroeconomic stabilization. While member states have institutionalized fiscal austerity and abandoned other macroeconomic levers, the European polity lacks the fiscal resources necessary to achieve stable macroeconomic conditions: smoothing the business cycle, ensuring growth and job creation, and mitigating the impact of asymmetric output shocks on consumption. Capital Markets Union, we argue, is an attempt by European policymakers to devise a financial fix for this structural capacity gap. Using its regulatory powers, the European Commission, supported by the European Central Bank (ECB), seeks to harness private financial markets and instruments to provide the public policy good of macroeconomic stabilization. We trace how technocrats, think tanks, and financial-sector lobbyists, through the strategic use of knowledge and expertise, established securitization and market-based finance as solutions to EMU's governance problems.

Strong Firms, Weak Banks: The Financial Consequences of Germany’s Export-Led Growth Model

“…The argument that 'bank regulation hurts SME financing' is ubiquitous in the discourse about financial policymaking. The notion that SMEs are financially constrained has also fuelled the EU agenda for a more market-based financial system with better SME access to capital markets (Braun and Hübner 2018;Hübner forthcoming). While SMEs in some euro area countries have indeed suffered a severe credit squeeze, the evidence for Germany points not to weak supply of capital from the financial sector but to weak demand by highly profitable non-financial firms.…”

Market-based but state-led: The role of public development banks in shaping market-based finance in the European Union

“…Based on the re-interpretation of Europe’s bank-based systems from a factor of stability to an obstacle to growth (Véron and Wolff, 2016), this initiative was a curious revival of the European Union (EU)’s high praise of capital markets. The lessons of the financial crisis, which had vividly demonstrated the volatility and self-recursive character of market-based credit intermediation, seemed quickly forgotten in the turn to a strategy of ‘governing through financial markets’ (see Braun and Hubner, 2018).…”

The waiting game: How securitization became the solution for the growth problem of the Eurozone

“…Add a political conjuncture in which the policy instruments to aid the slow recovery in the Eurozone are either blunt (take, e.g. quantitative easing) or have been a political taboo (fiscal stimulus) (see Braun and Hübner, 2018 ), the conclusion is that what we have here is an almost perfect example of how a ‘problem’ becomes a ‘solution’ if only one is able to wait long enough. This is what European banks apparently have been able to do, thanks to the liberal monetary policies pursued by the ECB since 2008, and the austerity policies pursued by the member states of the Eurozone.…”