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Comparing broken European capital markets to broken European Railways

Summary:
Klass Knott , Governor of Netherlands Central Bank in this speech compares State of European capital markets with European Railways: If you travel by train from the city of Bordeaux southward to Spain, at the border you will have aslightly strange experience. Since the rail gauges in France and Spain are of a different width, the rail bogies, that’s basically the wheels of the train, have to be replaced. A very heavy machine lifts the  train up, the bogies are rolled away and replaced by others. It takes about one hour before the traveler can resume his or her journey. This rather remarkable example of systems that do not fit together, and that reminds one of the nineteenth century, is not uncommon in European capital markets. This becomes clear if you compare it with the United

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Klass Knott , Governor of Netherlands Central Bank in this speech compares State of European capital markets with European Railways:

If you travel by train from the city of Bordeaux southward to Spain, at the border you will have aslightly strange experience. Since the rail gauges in France and Spain are of a different width, the rail bogies, that’s basically the wheels of the train, have to be replaced. A very heavy machine lifts the  train up, the bogies are rolled away and replaced by others. It takes about one hour before the traveler can resume his or her journey.

This rather remarkable example of systems that do not fit together, and that reminds one of the nineteenth century, is not uncommon in European capital markets. This becomes clear if you compare it with the United States. Consider a US investor located in Iowa who wants to invest in a firm located in Florida. Information on the firms finances can be readily accessed via the Securities and Exchange Commission, while securities and insolvency law are of course similar across states. Now consider the same process for a Belgian investor aiming to invest in Portugal. Firm information is scattered across business registries, while the investor has to accustom itself to various local rules. This goes from small discrepancies, such as rules on shareholder disclosure, to large differences, such as insolvency laws.

Whereas large areas of the European economy have become more and more integrated, capital markets in Europe are still fragmented to a large degree. This results in real costs. The Capital Markets Union has clearly moved on from being a ‘nice to have’ to a ‘need to have’. Why is a unified European capital market important and how do we get there? That is the topic of today.

In my remarks today I will first briefly share my view on why the Capital Markets Union is so important. As the potential benefits of the CMU are numerous, I will stick to why the CMU is important for us as a central bank. Second, I will put forward some guiding principles on how I believe further progress can be made.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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