Capital markets, explained

Once a low-profile issue, the Capital Markets Union (CMU) - an initiative aimed at creating a single, integrated capital market across EU member states - has now surged to a top policy priority in the EU. After taking centre stage in both the Letta and Draghi reports, completing the CMU is now the main objective of one of the Commission’s flagship initiatives: the Savings and Investment Union (SIU). The European Parliament is also preparing a report to clarify its stance on the topic.

The renewed attention comes from a growing belief that a completed CMU can help close the EU's investment gap using private capital. But, as we will show in this series, that logic is flawed.  Let’s start by taking a step back. 

What are capital markets?

Capital markets are where businesses and governments go to raise money to achieve their long-term objectives. As such, they constitute the financial backbone of our modern economic system. Though often seen as distant or abstract, they shape the world we live in - affecting jobs, innovation, and public services.

In capital markets,  buyers and sellers come together to trade financial instruments known as securities. Securities fall into two main categories:

• Equity, such as shares of stock, which confer ownership in a company and typically entitle investors to a share of profits through dividends; and

• Debt, such as bonds, which represent loans made to companies, governments, or financial institutions, to be repaid over time with interest.

Capital markets are fundamentally about connecting those who need capital with profit-seeking investors. The former are usually companies and governments seeking to raise long-term funds by issuing equity and debt securities on the primary market. For instance, a company might launch an Initial Public Offering (IPO) to raise funds for research, growth, or strategic acquisitions. Governments, in turn, issue bonds to finance public investment - such as building infrastructure like highways and bridges, expanding public transportation systems, funding schools and hospitals or to manage budget deficits. Commercial banks also play a role in primary markets through a process known as securitisation. This means that they package loans undertaken by their clients - such as mortgages and auto loans - and sell the resulting securities to third-party investors.

Once a security is issued, it enters the secondary market, where it is repeatedly bought and sold among investors - including individuals (like you and me), institutional investors (such as pension funds, insurance companies, and banks), and even central banks, which participate primarily to implement monetary policy. These investors trade securities to gain returns, maintain liquidity, and, in the case of central banks, conduct monetary policy.

But, capital markets don’t operate in a vacuum, they rely on a robust infrastructure. At the heart of this infrastructure are stock exchanges (like the London Stock Exchange), which provide the platforms for  securities to be  listed and traded. After a trade is executed, clearing houses step in as intermediaries between the buyer and seller, ensuring that transactions are settled correctly.

All of these actors operate under the oversight of regulatory authorities. In the EU, the European Securities and Markets Authority (ESMA) works alongside national regulators to enforce financial regulations and ensure investor protection. Regulation and oversight are essential to keeping capital markets stable. Without them, risks can accumulate unnoticed and destabilise the system. The 2008 Global Financial Crisis is a stark example of how risky behaviours and loose oversight in capital markets (and, in that specific case, in the securitisation market) triggered a global economic meltdown.

From an unfinished CMU…

Now that we have explained what capital markets are, we can finally focus on why the EU is making such a fuss about them. EU policymakers have been debating the creation of a CMU for a decade, setting in motion two CMU action plans, respectively in 2015 and 2020. In the wake of her re-election, EU Commission President, Ursula von der Leyen, made it clear that completing the CMU would be a priority of her mandate.

The idea behind the CMU is simple, in theory: to merge the EU’s 27 national capital markets into a single integrated system with common rules and oversight. This would allow capital to move freely across borders, making it easier for businesses - especially start-ups and scale-ups - to access funding.

In practice, progress has been slow. As highlighted in Enrico Letta’s report on the single market, Europe’s capital markets remain fragmented and uncompetitive. Most companies still rely heavily on bank loans, while high-risk, innovative firms often struggle to raise funds and end up moving to the US, where capital markets are more supportive.

This lack of competitiveness stems from each Member State having its own national tax system, legal framework, and regulatory approach. Investment habits and financial literacy also vary: for example, Germans and Italians often prefer bank savings, while Swedes and Dutch are more likely to invest in equities or pension funds. As a result, European capital markets are consistently punching below their weight - an issue that, until recently, was largely overlooked by policymakers.

… to a flawed Savings and Investment Union

In 2024, just a few months one from the other, the Letta and the Draghi report called for completing the CMU to strengthen the Single Market and boost competitiveness.  In March 2025, the Commission responded with the SIU: a new strategic framework to reform the EU’s financial system by focusing on integrating capital markets. 

The idea is straightforward. According to latest research, Europeans hold over €10 trillion in financial assets - much of which remains parked in bank deposits. Meanwhile, the EU faces an annual investment gap of €800 billion, driven by urgent and long-term needs in defence, competitiveness, and the green and digital transitions. 

The Union’s goal is to connect these dots: mobilise private savings, steer institutional investment towards strategic sectors, and finally complete the Capital Markets Union. 

To do so, the Commission proposes to:

• Promote financial literacy and make investments, especially in the pension sector, more accessible to retail investors

• Encourage institutional investors to invest in equity and growth sectors by removing tax barriers and adjusting regulations

• Revive the EU securitisation market by simplifying the existing regulatory framework

• Harmonise supervision between EU and national authorities

Some of these policy proposals are positive for fostering a healthy, integrated financial system. But the core idea - that private finance alone can solve the EU's public investment needs - is deeply flawed. 

In our view, strategic public investments must lead the way. 

More on that in the next blog!

The ongoing debate and next steps

The SIU communication sparked a heated debate in Brussels and beyond. Recent discussions in the European Council showed differing levels of urgency among EU governments: while leaders such as  France's Macron and Germany's Scholz pushed for progress, smaller countries, led by Ireland and Luxembourg, resisted, fearing centralised oversight and stronger competition. 

The European Parliament (EP) is also divided. Progressive MEPs advocate for stronger EU-level supervision, increased public investment, and alignment with strategic priorities like the green transition. Conservative groups, by contrast, prefer national control, resist deeper integration, and emphasise market neutrality and bottom-up approaches. To formalise its stance on the CMU and its implementation through the SIU, the EP is drafting a report, with a Committee vote expected in June and a plenary vote scheduled for September.

Meanwhile, the Commission is moving ahead. Reviews of the Securitisation Framework and the Retail Investment Strategy are underway, and proposals on financial literacy and investment accounts are expected by the end of summer.

We’ll follow these developments closely - and in our next blog, we’ll share our vision for a better, fairer CMU built around public interest, not just private capital.