How Europe could recover

Carmine Di Noia

The author is Commissioner of the Italian Securities and Exchange Commission Consob and Chairman of the Committee for Economic and Market Analysis of the European Securities Commission, Esma.

The Capital Markets Union (CMU) is the EU’s ambitious plan to create a common market for capital. The aim is that savings and investments can move freely in the EU and so consumers, investors and companies benefit from it, no matter where they are located.

The Capital Markets Union is essential for the EU to achieve its political goals of sustainable development, digital leadership and innovation. But the Capital Markets Union is even more important in the context of the economic recovery from the Covid 19 crisis: We have to attract substantial amounts of capital from the EU and from outside the EU. Three things are important for this:

  1. The participation of private investors in the capital market must increase – while maintaining an appropriate level of investor protection. A necessary condition for increasing the number of investors is access to simple and understandable financial instruments.

    There are already financial education programs in place in many countries that are quite effective. But additional measures on the part of the EU institutions would certainly be helpful. It is important to promote a new European equity culture, including the development of real pan-European offerings like the European Pension (PEPP).

    A better comparability of the information about the development of costs and returns of the various financial products is also necessary. Qualified consultants are also required. At the same time, it should be clear that the aim of protecting investors cannot be to influence them and prevent them from making decisions: overregulation could have counterproductive consequences.

  2. Investors might find it useful to have a single (digital) place where they can get financial and non-financial information about companies they want to invest in – and also a place where they can check the market prices of those companies.

    You don’t learn anything about this from the market itself, so public support is necessary. The creation of a single EU access point for financial and sustainability information about companies is very welcome. This place must contain comparable and standardized information in digital format.

  3. We need proportionality in regulation and supervision. Businesses start small and grow big. We need simplifications, harmonizations and codifications of the regulatory texts at EU level. We also need to create more clarity for the benefit of market participants.

    At the same time, a more efficient convergence of supervisory practices needs to be achieved. A more integrated system of capital market supervision would be useful. It is too early to have a single supervisor at EU level, but it is also too late to have supervision only at national level.

    We must be prepared for the scenario of increasingly important financial transactions being monitored at EU level based on criteria such as size, transnational activities, large or small investors or cross-border contagion risks.

After the Action Plan for the Capital Markets Union was presented by the EU Commission in 2015, there were two breaks: Brexit and Covid-19. But I believe that both are challenges that only reinforce the need for the Capital Markets Union.

Brexit brings a dramatic change, because the largest European financial market is leaving the EU; at the same time it is an opportunity to strengthen the EU dimension of market infrastructures, intermediaries and investors.

Covid-19 harbors another dramatic change. We have seen an extraordinary collapse in the markets – and a transformation. Still, there are opportunities for supply (the unprecedented amount of funding made available by fiscal and monetary policies) and demand (companies will need refinancing to offset their debt).

I believe that the Capital Markets Union will not come without an impetus from the highest EU level, from the Commission, Parliament and the European Council, as well as from the European Central Bank and the European supervisory authorities.

The EU’s new CMU Action Plan, published in September, is more than welcome. The European Parliament and its Economic and Financial Committee clarify what can be achieved.

We need a coordinated plan, if possible for the meeting of the economic and finance ministers (Ecofin Council) on December 1, which contains a binding schedule and rigorous control options. Once things get going, deals will be made and there will be growing trust.

More: Read here why European politicians warn the EU against interfering with lending.

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Boris Johnson’s insight would also be welcome in the case of Brexit negotiations

Prime Minister Boris Johnson

To Johnson’s chagrin, the lockdown opponents are represented above average in his own faction.

(Photo: AP)

If Boris Johnson weren’t prime minister, he would probably write newspaper columns against the lockdown – this assessment by a British commentator fits the Tory’s divisions over the corona crisis quite well. But Johnson is currently less guided by his libertarian instinct than by cautious virologists.

With his four-week lockdown plans, he is swimming with Angela Merkel and Emmanuel Macron in the European mainstream. According to surveys, three quarters of Britons support the further closings of restaurants, shops and leisure facilities in order to bring the virus under control.

But there is also a vocal minority of lockdown opponents in the kingdom. To Johnson’s chagrin, they are well represented in his own faction. Two dozen conservative rebels are expected to vote in parliament on the new corona measures on Wednesday.

It is essentially the hard core of the Brexiteers opposed to lockdown as the latest incarnation of the encroaching state. Unsurprisingly, right-wing populist Nigel Farage jumped on the bandwagon: His Brexit party, which has lost its purpose, is to agitate against the corona restrictions under the name Reform UK.

Johnson’s old companions from Brexit times are disappointed that the prime minister is not loyal to the line on the Corona issue. Instead of defending the freedom of the English, he let the virologists take him hostage, they complain.

This shows the difference between populist public opinion and responsible government action. The number of infections and deaths in England is rising so rapidly that Johnson could no longer stand idly by.

The virologists warn of up to 85,000 deaths this winter. Nobody knows whether this forecast would actually come true. But a head of government cannot take it seriously.

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Outlook: How much the new Corona uncertainties are slowing down the DAX and Co.

The dynamics of the second corona wave surprised many stock marketers. Even if a real crash in prices is very unlikely, the situation remains fragile. The uncertainty of market participants in view of the further increase in the number of corona cases and political imponderables such as the US presidential election, the (unsuccessful?) Struggle for the US aid package and the hanging game over Brexit remains high. But there are also opportunities. A weekly outlook.

The harsh Corona reality should prevent big jumps on the German stock market in the new week. After the hope of another US economic stimulus package to combat the economic consequences of the pandemic had supported the prices at the beginning of October, concerns about a loss of control over the development of the infection are now growing.

Chief economist Ulrich Kater from Dekabank wrote that although the infection rate seems to be worst in Europe, the numbers in the USA also continued to rise. This will result in economic setbacks in the current quarter: “A slump like the one in spring is not to be feared, because the economy has become more flexible. But further declines in overall economic activity are possible.” Overall, the risks would increase and in such a situation market participants would become more cautious.

On Friday, the DAX managed to bring a very turbulent week to a conciliatory end. The leading index started the weekend at 12,909 points – with a week minus of a good one percent.

From a technical chart point of view, however, the situation on the DAX does not appear too tense, wrote the authors of the stock market letter Futures exchange von Bernecker: “As long as the DAX stays in the previous range, nothing burns.”

It is now important that the lower edge of the month-long trading range is kept at around 12,500 points, but even a decline of another 500 points to 12,000 points would not be a catastrophe, even the opposite: At this level, the prices could have fallen so far that the Investors are no longer ready to sell more stocks at such a low level.

And this would then also be “the surest guarantee that an autumn rally will be possible”. The prerequisite for this is that the news status regarding coronavirus is not too negative.

Focus on economic data

In addition, investors should also take a look at economic data in the new week in order to better assess the economic consequences of the pandemic. According to analyst Claudia Windt from Landesbank Helaba, the German and European purchasing manager indices should prove on Friday in the reporting week that the economy is getting bumpy in this country. At the same time, however, the Chinese growth figures for the third quarter at the beginning of the week would show that the economy there is on a solid recovery path. The country has known how to avoid a second wave of infections so far.

All in all, according to Windt, there should hardly be any positive impulses for the capital markets in the new week that would allow investors to switch fully back to risk mode – i.e. buy heavily. Rather, security should be preferred, especially since the Brexit hanging game is not over yet.

British Prime Minister Boris Johnson now expects a hard break without a treaty with the European Union (EU) on January 1st. The EU evidently has no interest in a free trade agreement desired by Great Britain, as with Canada. Accordingly, one now expects a relationship like with Australia, i.e. without a contract.

First German companies with quarterly figures

Business figures from companies are still quite rare in the new week. The pharmaceutical and laboratory supplier reported on Tuesday Sartorius over the past quarter before the Wednesday Software AG presented their results. In the further course of the week then follow with the telecommunications equipment supplier Adva Optical Networking and the personnel service provider Amadeus Fire (both on Thursday) as well as the electronics dealer Ceconomy and the seed company KWS Hour (both on Friday) four companies listed in the SDAX small cap index.

According to analyst Michael Bissinger from DZ Bank, the reporting season for the third quarter should show that companies are still suffering from the coronavirus, but significant progress has been made since the low point in the second quarter.

The assessment is no coincidence: in the past few days, companies like Daimler, BASF, Evonik and Covestro Surprised positively with their key data for the third quarter.

However, according to Bissinger, in addition to Corona and a large number of political risks, the high valuation level that shares have now reached has a dampening effect on price development. (With material from dpa-AFX)

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Preparing for the break – with or without a deal

London, Düsseldorf The story of Brexit is the story of the deadlines and ultimatums that have passed. When things got tight, somehow there was always an extension at the last minute. This has been going on since the British referendum in 2016 – and outside the continent, people rub their eyes in amazement at the self-damaging theater Europeans are affording in these geopolitically tense times.

It was the usual incantation politicians use when there is nothing substantial to report. “We are striving for a strong basis for a strategic relationship between Great Britain and the EU,” said EU Commission chief Ursula von der Leyen and British Prime Minister Boris Johnson on Saturday after a meeting. There is “progress, but also significant gaps”

But time is running out, the countdown to a Brexit without a contract is running. Johnson had set a negotiation deadline of October 15, and the ninth round of negotiations ended on Friday without a breakthrough. Experts expect the talks to possibly drag on into the first week of November.

This week, the machine of crisis diplomacy is once again running at full speed. On Monday, EU chief negotiator Michel Barnier will meet Chancellor Angela Merkel in Berlin to sharpen the EU strategy. Johnson will also have to move for a deal.

Only one deadline should not be shaken: On December 31st, Great Britain leaves the European single market and the customs union – with or without a deal. If the country goes without a contract, the once close EU partner would be downgraded to WTO status. That means there are high tariffs and trade barriers.

The majority of German companies now firmly anticipate this scenario and have already prepared for the worst, as a survey by the Handelsblatt showed. Whether in the transport sector, in industry or in the chemical sector – despite good preparation, a Brexit without a free trade agreement is likely to hit many sectors.

However, chaos threatens, especially on the British side. Whatever the outcome of the last decisive round of negotiations: “The consequences of the separation will be serious,” says Ifo boss Clemens Fuest, “and they will keep us busy for a long time.”

The economic risks

A look at the statistics shows what is at stake economically for both sides. The EU is not only losing its second largest economy – and with it a sixth of its economic power. Both sides are also structurally deeply intertwined.

In 2019, Great Britain exported goods worth 187 billion euros to the EU, 40 billion of them to Germany alone, which is the second largest buyer of British goods behind the USA (67 billion euros). But vice versa there is also a dependency – especially German companies. With a volume of 79 billion euros, the kingdom ranks fifth among German export destinations.

The Chancellor, who, as EU Council President, will play a key role in the current talks, knows all this. “As long as negotiations continue, I will remain optimistic,” said Merkel after the summit on Friday. In the end, it all depends on what the kingdom wants – and what it doesn’t want. On Monday, when EU chief negotiator Michel Barnier is in Berlin, it should be about exploring new compromise lines.

Johnson confirmed on Sunday on the BBC that he doesn’t really want a “no deal” but that he can live with it. An agreement is in sight, but some difficulties still have to be overcome, said the prime minister.
Barnier noted on Friday “persistently serious differences” in the central issues of fisheries and state aid. The British negotiator, David Frost, saw slight progress overall, but in fisheries the gap was “unfortunately very large” and may not be bridged if the EU no longer showed “flexibility and realism”. Barnier always mentioned the end of October as the deadline for concluding the negotiations. Otherwise there would not be enough time for the ratification of the free trade agreement in the European Parliament.

The cost of a “no deal”

In the event of a disorderly Brexit, the World Trade Organization (WTO) tariffs will apply to all imports between Great Britain and the EU from January 1st. That would drive up the cost of living on the island and affect sales for European exporters. There are also further trade barriers if the partners no longer recognize each other’s quality and safety standards and their professional qualifications. In the event of a no deal, it can be expected that the EU will introduce transitional regulations for the most important industries. That would mitigate the consequences.

A study by the London School of Economics estimates that the UK economy would grow around six percentage points less than if the country were still in the EU in the ten years after a disorderly Brexit.

For comparison: The corona crisis will only cost two percentage points of growth over the same period. The no-deal effect would be three times as high as the corona effect in the long term. “Johnson is seriously concerned about the cost of a no deal,” says LSE policy professor Simon Hix.

On the continental European side, too, the economic consequences should not be underestimated, even if they will not be quite as drastic as in the Kingdom. But it’s not just about pure economy. “As an important EU country, the United Kingdom was an actor with considerable global influence,” says Fuest – in terms of security, geopolitical and cultural considerations.

More: Read here why Boris Johnson’s poor corona management could cost him the job. A comment.

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