Towards a unified Capital Markets Union: bridging fragmentation and fostering growth

By Arminta Saladžienė, Vice President, European Markets at Nasdaq and Chair of the Supervisory Boards of Nasdaq CSD, Nasdaq Tallinn, Nasdaq Riga, and Nasdaq Vilnius

In an era of rapid global shifts and technological advancement, the European Union stands at a crossroads. The Capital Markets Union (CMU) initiative, aimed at creating a single market for capital across the EU, has never been more crucial. As we look to the future, it’s time to reimagine and reinvigorate the CMU, drawing inspiration from successful experiences of the Nordic and Baltic countries.

The CMU vision: more than just capital

The CMU is about creating a robust, interconnected financial ecosystem that drives innovation, sustainability, and prosperity. It aims to finance the green and digital transitions, promoting capital flow to businesses that need it the most. This stimulates productivity, creates jobs, and increases prosperity.

Recent evidence suggests the EU’s issue is not a lack of capital, but rather a shortage of risk-prone capital. This insight shifts our focus towards activating retail investors, directing pension funds into equity markets, and fostering entrepreneurship.

In 2024, we saw the largest performance gap between the US and EU stock markets since 1995, with the S&P 500 outperforming the STOXX 600 by 20 percent, highlighting the EU’s weaker capital markets. The next five years of the CMU should go beyond direct interventions and explore innovative ways to stimulate investment and risk-taking.

The EU has advanced in developing interconnected transport systems, power grids, and communication networks. However, barriers impede the financial infrastructure “highways” needed to effectively connect companies with investors within the internal market. This fragmentation increases costs, decreases the appeal of going public, motivates issuers to seek opportunities outside the EU, and limits the pool of securities available to investors.

By addressing inefficiencies in the post-trade infrastructure and harmonising corporate, securities, and insolvency laws, as well as market practices, the CMU can promote a more integrated and efficient financial environment, thereby supporting growth and innovation across the EU.

Learnings from the Nordics and Baltics

The Nordic and Baltic regions have long been at the forefront of financial innovation and market efficiency. One of the key elements of their approach is the development of local and regional markets. They have shown that strong local markets can form the foundation of a robust, interconnected financial system.

Take Sweden as an example: a thriving capital market ecosystem with 660 IPOs over the last decade, mostly from SMEs, strong returns, and a robust investment culture where over a third of the population holds investment savings accounts. Government reforms and tax incentives have played crucial roles in promoting risk-taking and activating retail investors. For instance, Sweden’s Investeringssparkonto (investment savings account ISK) reform showcases how such incentives can encourage broader participation in capital markets. Implementing similar measures across the EU could stimulate retail investment and support their growth.

Nordic pension reforms have also been instrumental in encouraging long-term investment in capital markets. Today, 62% of EU pension assets are concentrated in Sweden, Denmark, and the Netherlands – this needs to scale across the bloc. These reforms not only secure better returns for pensioners but also provide a steady flow of capital for businesses.

Support for entrepreneurs is another hallmark of the Nordic-Baltic financial ecosystem. The region is renowned for its robust support of startups and scale-ups, providing fertile ground for innovation and economic growth.

The Baltic region serves as a benchmark for market-driven consolidation of post-trade infrastructures. The merger of the Central Securities Depositories (CSDs) in Estonia, Latvia, and Lithuania into a single Nasdaq CSD demonstrates the potential for regional cooperation to overcome fragmentation and create efficient, harmonized ecosystem.

As the EU charts its path forward, the success of the Nordic-Baltic region offers a valuable blueprint for a unified and prosperous capital market. It underlines the importance of local market development, tax incentives, pension reforms and entrepreneurial support in creating a dynamic and resilient financial system.

A two-pronged approach: national and EU-level actions

To truly advance the CMU, a coordinated effort at both national and EU levels is essential.

On the national level, it is critical to establish and swiftly implement comprehensive reform plans designed to boost capital markets. These plans should include strategies for reforming pension systems to encourage long-term investment. Additionally, creating tax incentives that promote risk-taking and retail investor participation is paramount. Furthermore, fostering a culture of entrepreneurship and innovation through targeted support programs will significantly contribute to the overall CMU success.

On the EU level, harmonising regulations to reduce cross-border investment barriers is imperative. Developing EU-wide initiatives that bolster Member States’ efforts can significantly enhance their reform effectiveness. Promoting financial literacy programs across the continent will empower citizens to actively participate in capital markets. Finally, sharing the best practices among Member States can provide valuable insights and guidance for broader implementation of the CMU.

The road ahead: a call to action

The future of the CMU is in our hands. A call for bold actions and collaborative effort echoes across the continent, urging policymakers, financial institutions, entrepreneurs, investors, and citizens to play their part.

Policymakers can take the lead in implementing a two-pronged approach, focusing on national reforms alongside EU-level initiatives. They are encouraged to look at the Nordic-Baltic model for inspiration, drawing on successful practices.

Financial institutions are called upon to embrace innovation and digitalisation, making capital markets more accessible to retail investors. They are invited to develop products that cater to the growing demand for sustainable and socially responsible investments, in line with the CMU goals.

Entrepreneurs and businesses are prompted to engage with policymakers to ensure the reforms meet their needs. By leveraging the opportunities provided by a more integrated European capital market, they can fuel their growth and innovation, contributing to the continent’s economic dynamism.

Investors are urged to educate themselves about the evolving opportunities within European capital markets. Diversifying portfolios across borders and asset classes will not only enhance their financial returns but also support the broader economic integration.

Lastly, citizens are encouraged to take an active interest in financial literacy. Understanding how capital market participation can contribute to their long-term financial well-being and the economic prosperity of Europe is crucial for the success of the CMU.

The Capital Markets Union is not just a policy initiative; it’s a shared vision for a prosperous, innovative, and sustainable Europe. By working together, we can unlock the full potential of European capital markets.

Are you ready to play your part in shaping the future of Europe?

As an international financial institution, NIB also aims bring additional value to its owners by promoting sustainable finance and supporting capital market development. The Bank invests in green bonds, social bonds, sustainability bonds and sustainability-linked bonds as well as MREL-bonds as part of its lending activities.

Since 2016, NIB has invested over EUR 1 billion in labelled bonds and MREL-bonds issued by companies or municipalities in the Bank’s member countries. The investments are used to finance environmentally sustainable projects that can contribute to mitigating climate change and achieve positive social outcomes in the Nordic-Baltic region.