Capital Markets Union, stock market investors’ view

In light of the European Commission's renewal, new priorities aimed at enhancing the integration of EU capital markets are being discussed. Examining the benefits of stock diversification within the EU over the last decade, researchers Jean-Baptiste Gossé and Camille Jehle from Banque De France found that investors in several European countries could have improved their performance by diversifying their portfolios across borders. This diversification could have been achieved without compromising institutional quality or increasing political risk. The study highlights that cross-border investment facilitation and stock market development, especially in Central and Eastern European countries (CEECs), would be beneficial.

Despite the creation of the Economic and Monetary Union (EMU) and efforts through the Capital Markets Union action plans, a persistent home bias remains in the euro area. Capital, ideally, should flow from wealthier to poorer countries, but various frictions, such as information asymmetry and market imperfections, prevent this. The European institutions' ongoing efforts to reduce these frictions aim to make better use of Europe's capital markets, mobilize private investments, and finance innovation with minimal government support. Gossé and Jehle's findings support the idea that greater stock portfolio diversification within the EU could significantly enhance investor gains, particularly if equity markets in less developed countries like those in CEECs were expanded.

The study indicates that reducing investment barriers within the EU could decrease home bias and improve portfolio diversification, ultimately leading to better capital allocation. This improvement would necessitate the development of financial markets in CEECs to match their economic size, ensuring a balance between the demand and supply of shares. Enhanced financial markets in these regions would ease capital access for CEEC firms, which have seen decreased investment levels since the global crisis. Therefore, from a financial investor's perspective, deepening the Capital Markets Union and developing financial markets in CEECs are crucial steps toward achieving significant diversification gains and economic benefits.