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European Affairs
Finance and Banking
A Transatlantic Securities Market Would Benefit Everyone
By Günter Burghardt
A Transatlantic Securities Market is an idea whose time is coming. I believe that it is urgently needed. The European Union certainly intends to pursue the idea in future high-level contacts with the United States.
What we need is an open market in which European and American investors and traders can buy and sell financial products of companies and firms on the other side of the Atlantic as easily as if they were buying or selling domestic financial products at home, with equivalent levels of appropriate investor protection.
This means a market in which:
Investors can choose to buy products wherever they wish that are best tailored to their individual needs and that allow them to balance and diversify their investments and risk in the way that best suits them.
Companies have the freedom to raise capital in the most efficient and cost-effective way possible. This could be particularly important for small and medium-sized enterprises.
Investors have access to adequate and timely information, preferably ensured by one set of principles-based global accounting rules.
Investors and companies both have confidence in the accountability, transparency and financial stability of the markets. This means a market that is underpinned by high and equivalent standards of regulation and effective day-to-day supervision, with regulators working together, not duplicating each other's efforts and costs or, at worst, undermining each other.
There are three reasons why we need a Transatlantic securities market. The first is that such a market could bring huge economic and social benefits.
The European Union is on the verge of creating an internal market of over 450 million people. If we can link up with the United States, we will have a Transatlantic market of around 740 million potential investors. The Transatlantic Business Dialogue plans to issue a report on the benefits of Transatlantic capital market integration by the middle of this year. But some excellent work has already been done.
In December, a study by Benn Steil published by the International Security Markets Association (ISMA) in cooperation with the Council on Foreign Relations estimated that a true integration of financial markets could lower trading costs on both sides of the Atlantic by 60 percent. This would lead to a 50 percent increase in U.S. and European trading volumes and a nine percent reduction in the cost of equity capital, according to Mr. Steil. And this, he added, was just a conservative estimate.
In Europe, two recent studies suggested that an integrated European financial market could lead to an increase of around one percent in EU gross domestic product and a sustained 0.7 percent to 0.9 percent increase in manufacturing growth. Employment could rise by 0.5 percent. That was without even examining the much larger gains in an enlarged European Union.
The second reason for creating a Transatlantic market is that we must be wary of the status quo. Doing nothing means letting significant barriers persist.
The European Union, for instance, is to adopt International Accounting Standards from 2005, greatly reducing the burdens and costs on companies doing business across EU internal borders. Those looking to do business in the United States, however, will still face the costs of reconciling those accounts with U.S. Generally Accepted Accounting Principles (GAAP) standards.
Again, European exchanges seeking to offer their services to U.S. investors through the installation of trading screens - thus allowing those investors the kind of choice that we believe to be necessary - are being prevented from doing so by unnecessary duplicative requirements.
Neither of these barriers is in the interests of either the European Union or the United States. They are penalizing our companies and investors. We welcome the recent project of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on the convergence of accounting standards by 2005, and we look forward to proposals from the U.S. Securities and Exchange Commission so that significant steps can be taken on trading screens early in 2003.
More broadly, we must work to remove all trading barriers if we are to move toward Transatlantic convergence. I believe that the EU market is open; we want the same openness from our major trading partners.
The third point is that U.S. regulations affect Europe, and vice versa. The recent Sarbanes-Oxley Act in the United States is a classic example of this phenomenon.
In seeking to protect U.S. investors, Congress has - presumably inadvertently - placed heavy and duplicative requirements on EU companies whose shares are listed in the United States, and even on EU companies that are merely subsidiaries of U.S.-listed companies. Auditors of EU companies face similar burdens.
Worse still, some of these regulations directly contradict the national requirements of the EU member states where the companies and auditors concerned are based. One aspect, Section 402, which prohibits an SEC-registered issuer from extending or arranging credit in the form of a personal loan to its directors or executive officers, is blatantly discriminatory, and has been recognised as such by the SEC.
The European Union is working intensively with the U.S. authorities to repair the damage and to find mutually acceptable solutions. This is a test case of whether EU-U.S. regulatory convergence can work in practice.
We must accordingly act now, not just to secure the benefits of a Transatlantic securities market, but also to tackle the very real problems that are already emerging. We have no choice but to work together, and regulators must be at the heart of our efforts. If not, the regulatory problems are bound to become more complex and difficult in future.
How can we best go about achieving a Transatlantic Securities Market? In March last year, the European Commission and the U.S. Treasury opened two new dialogues to look at issues of mutual concern: a specific dialogue on financial conglomerates, and a much wider-ranging informal dialogue on financial markets covering corporate governance and access for exchanges.
This dialogue is now part of the so-called Positive Economic Agenda that was launched by European Commission President Romano Prodi and President George Bush last April. We have embarked on an intense dialogue with the U.S. Treasury and the SEC, and we have drawn up a concrete work program.
The dialogue has four basic objectives. First, we are trying to identify possible new problems before they arise. We hope that, by listening to each other's comments on the potential effects of legislation before it is adopted, we can avoid the time-consuming difficulties and costs of ex-post regulatory repair that we are having to perform on Sarbanes-Oxley.
We are already doing this with regard to our proposal on financial conglomerates - indeed, full consultation with all interested parties is central to the way in which the European Union operates.
Second, we want to remove barriers contained in existing legislation and standards by identifying step-by-step roadmaps. An EU-U.S. agreement on mutual recognition of each other's standards is the best, indeed the only, long term way of achieving this in a way that will give investors and companies the confidence they require.
Third, we must engage with each other in an educational process on the details of our legislation and rules. In a global market, it is unacceptable for regulators to be ignorant of each others' regulatory standards.
Fourth, there must be much greater day-to-day cooperation between national regulators on both sides of the Atlantic to prevent systemic or prudential problems.
We have started this process, but it will be a long haul. If we are to achieve results over the medium to long term, we need to be able to show early progress. Nothing breeds success like success. A Transatlantic securities market is not an option; it is an economic and regulatory necessity.
Günter Burghardt is the Head of the Delegation of the European Commission in the United States. Before his appointment in January 2000, Ambassador Burghardt served at the European Commission in Brussels in several capacities, starting in 1970. His most recent position was Director-General for External Relations.