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Letter from Luxembourg, June 2024

Date added: 28 June 2024
  • FBC News ,  
  • Features

Sheenagh Gordon-Hart, Independent Director at The Director’s Office 

Halfway through the year already – and what a big year it is, at least politically. The results of the European parliamentary elections are in, and jostling for the top jobs has begun in earnest.

Interestingly, and likely comforting for Brussels insiders, the turnout was better than it has been for twenty-five years at 51.1% but still nowhere near what true enthusiasts would like to see.

While the turnout was a bit higher, the results will have significant impact and alongside change in the Brussels institutions, the aftershocks are being felt at national level with President Macron dissolving the French parliament and calling a general election immediately in the wake of the European results, and rumours of potential change in leadership of ruling coalitions elsewhere. But turning back to the European institutions, one of the key battlegrounds is for Commission President; after all it is in the Commission where the real power lies. Before she is officially crowned for a second term, if indeed she is, Ursula von der Leyen will have several tricky ‘deals’ to forge, some of which may undermine previously iron-clad policy commitments. She requires 361 votes in parliament to secure her continued role, and while her party grouping, the EPP, is the largest in parliament, it has only 189 seats, so from where will she secure the additional votes? And what price will be exacted in terms of policy? This is important for all of us in the asset management industry because so much Commission policy results in regulation directly impacting our sector. VDL has a difficult path to navigate and the EPP may try to buy time to build a stable coalition in her favour by deferring the parliamentary vote from July to September. For now, it seems she will try to build the necessary bloc of votes and meanwhile Brussels-watchers will try to distill what the changing backdrop will mean but it’s almost certainly the case that policymakers will have a rougher ride during this next five-year term than they had in the last one. 

Politics apart, a new report was published in April focused on maintaining single market momentum and revitalizing Capital Markets Union. The catchy title for the report – ‘Much More than a Market, Speed, Security, Solidarity, Empowering the Single Market to deliver a sustainable future and prosperity for all EU citizens’ (!) – belies some ambitious ideas and the renaming of CMU as the ‘Savings and Investment Union’. The report is better labeled with the name of its author, Enrico Letta, a former prime minister of Italy. The Letta report was commissioned by Council and Commission last year and may provide a hint of policy priorities for the next Commission. In common with many pronouncements on the EU’s challenges, the report bemoans the economic gap between the EU and US, noting that since 1993 while per capita GDP in the US has grown by 60%, the equivalent figure for the EU is less than half that. Letta also points out that around 300 million euros pa of European investors’ savings are diverted abroad principally to the US and because achieving the EU’s key objectives1 will entail ‘high collective costs’ suggests that such investments could be redirected effectively to achieve the EU’s strategic objectives. Several parts of this report are key for asset managers, notably the ambition to mobilise more of European investors’ savings currently languishing unproductively in bank accounts. However, leaving aside the distasteful anti-American flavour that peppers the report, one big thing struck me: Letta calls for ‘an effective instrument to channel retail savings into the European real economy’, as if we haven’t already got one in the form of UCITS. Has Signor Letta never heard of UCITS, have all the years of lobbying by the industry, efforts to ensure well-informed regulation emerges from the corridors of power, efforts to educate legislators and policymakers of the virtues of the asset management industry, have all these failed? Have we as an industry failed, or is Letta falling into the trap of thinking that inventing yet another, different construct for channeling savings into investment, probably handily called a Letta Fund or some such, will solve the problem? Hyperbole aside, Letta recognizes the need to get money out of bank accounts and invested in the real economy and it seems momentum is building to rescue CMU with ESMA following up on Letta with a position paper published in May entitled ‘Building more effective and attractive capital markets in the EU’. ESMA’s paper bears striking similarity to the Letta report in some respects, and it calls for, amongst a number of other proposals, an EU label for basic, simple investment products for retail investors with the label also available for ‘suitable’ equity and debt securities. Not sure I agree with the bifurcation of UCITS in this way, nor do I think that regulators and policymakers should start meddling with or determining which equities I might wish to buy are deemed ‘suitable’ for me. Last week, EFAMA weighed in on what will clearly be a central theme for the new Commission, with its Senior Director, Bernard Delbecque calling for ‘a decisive shift in EU policies to enhance investment opportunities and boost the valuation of European companies’. The policy shifts called for by Mr Delbecque, notably industrial and competition policy, will, even if acceptable to the competing interests across EU Member States, take a considerable period of time to deliver tangible results; even then will the results make the EU look like a more attractive market than others competing for investor attention? Maybe the ambition needs to be helped along with a big dose of deregulation? 

On a positive note, it is clear that the asset management industry has a big role to play as policymakers strive to turn savers into investors. And cross-border asset managers are well-positioned to help build products for a wider audience, particularly if Member States can be persuaded to offer suitably flexible fiscal incentives. I for one am looking forward to seeing what the next Commission will bring forward in terms of policy ambitions and to participate in the discussions of the best way to turn those ambitions into reality.