Someone on twitter posted this clearly AI-generated image of burning money. See how many mistakes you can spot in the Euros. I think the one on the left is even an upside-down Bennie Franklin, although these are all supposed to be Euros.

I blogged a while ago about how Mario Draghi wants Europe’s capital markets to be more unified to spur growth. I outlined how this was not just a matter of putting ink to paper, unifying the capital markets means unifying EU investment laws. And since those laws involve things like property rights, worker’s rights, bankruptcy rights etc, some people are going to win or lose out if everyone suddenly has to have the same investment laws. Workers whose jobs were once guaranteed even during a bankruptcy won’t appreciate that protection being removed. Companies in jurisdictions which don’t guarantee workers’ jobs like that won’t appreciate the added costs and may even close up shop, leading to no jobs for those workers at all.

But I wanted to write more on this topic as it’s a subject that interests me. And rather than last time where I went deep into the weeds outlining how one specific regulation (bankruptcy) differed across the EU’s many member states, this time I’d like to take a more broad approach to the many ways the EU’s capital markets are fragmented. And I’d like to point out that overcoming this fragmentation and unifying the markets will involve some nations winning or losing out, which is why the markets haven’t unified yet, no one wants to be the loser.

First, let’s talk Central Securities Depositories. A Central Securities Depository (CSD) is responsible for making sure that when a buyer and seller trade a financial asset, whether that’s a stock or a bond or what have you, the buyer gets the asset and the seller gets the money. Ensuring that an agreed-upon trade actually *happens* is fundamental to a working financial market. You wouldn’t go to the store if there was a chance you’d pay your money and the cashier would keep your groceries, same thing with financial markets.

The USA has a single CSD. It’s a private company but with heavy government oversight. The EU has dozens of CSDs, structured very similarly. But with dozens of CSDs to work with rather than just one, buying and selling of assets becomes a hassle. “Settlement” is the term used in finance for when the buyer and seller actually exchange money for assets, and there is a small cost associated with settlement to make sure everything is legal and on-the-level. The EU having dozens of CSDs instead of just one raises those settlement costs substantially, that in turn increases friction in the financial markets and decreases investment.

The EU wants to unify their capital markets and have just one single CSD. But will it be the French CSD, thus bringing more jobs to France? Or the Italian CSD, bringing jobs to Italy? Everyone wants their CSD to be the European CSD, and no one wants their country to lose all the high-paying jobs and high-status institutions that a CSD brings with it.

Now let’s talk about IPOs. European financial leaders have bemoaned that America has way more high-valued startups than Europe, and that European startups often flee to America rather than staying home. IPOs have at least something to do with this.

When a startup IPOs, they sell ownership of their company in exchange for investors’ money. This is a powerful way for the startup to get needed cash, and for investors to get in on the ground floor. But while Europe may have almost as much money floating around as America does, that money is in dozens of different national silos split up by regulation. You need to just adhere to 1 set of regulations to get access to all of America’s investment money, you need to adhere to dozens of sets of European regulations to get access to European money. Is it any wonder then that companies IPO in America?

But say you purchase stock in an IPO, only to lose everything because the executives were overpromising and hiding the company’s problems. Can you sue the company to recover your lost investment? Well, it heavily depends on which country you bought the stock in. Countries with strict investor protections won’t enjoy losing those protections if the EU unifies its capital markets. Countries with more lax protections generally want to prevent frivolous lawsuits from investors, who may have been well aware of the risks of a stock but still want to blame the company for their investment going south. Those countries won’t appreciate new investor protections that encourage ever more investor lawsuits.

Then thinking about IPOs, there are a lot more rules about how the shares must be structured. If you are the CEO and founder of a company, you want to IPO to get money, but you may want to keep holding all the power and control over your company. How can you sell off ownership of your company without losing any of the power and control that ownership brings?

One way is to only sell a small portion of your company’s value. You can sell off 10% or 15% or 25% of it to raise money but keep the rest for yourself. This makes you a huge majority shareholder who can never be outvoted in matters of corporate governance.

This structure poses risks to the minority shareholders, both in terms of shareholder rights and in terms of stock value. This structure, where one person owns a large part of the companies, is part of why the Adani companies collapsed so spectacularly in value back in 2023. Adani owned 75% of his companies outright. Some shareholders though this protected them “Adani will never sell, so the value cannot drop.” But actually it didn’t protect them at all, Adani would never sell, but he could also never buy.

The value of the companies wasn’t based on what Adani himself would do, his 75% ownership was locked in and unchanging. Rather the value was based on what a small minority of investors thought, the other 25% owners. If some of those investors started selling, and if no other participants in the market were willing to buy, then the price would collapse *fast* because there’s a lot less buyers and sellers available than what it may seems. Adani and his 75% ownership could not be a buyer or seller, so the market for Adani shares was 1/4 as large as it seemed to be based on the listed value of his companies.

So anyway, minority shareholders can get washed by a majority shareholder keeping all the shares to himself and ignoring their rights. Different EU companies have different rules about how much of a company a majority shareholder can retain, and what the rights of minority shareholders are. Someone is going to lose out if those rules are unified across the EU. Some companies will find their ownership structure is no longer legal, and their majority shareholders will be forced to sell. Or if majority shareholders end up being able to have a *larger* stake, some market watchers will decry that this keeps too much power in the hands of rich majority shareholders, rather than in the hands of the small minority shareholders (aka “the people”).

Then there’s taxes. Say you are a German living in Germany, but you own shares in France’s Francis Frances (FFF), incorporated in the Netherlands. Your shares in FFF pay a dividend to you, which you receive as income.

Now, the Netherlands wants you to pay tax on that income, so they tax your dividend as the money leaves their country. Germany also wants you to pay tax on that income, so they tax your dividend as the money comes into Germany. You pay dividend taxes twice, while if you’d just invested in a Germany company and ignored the Netherlands entirely, you’d have only been taxes once.

But OK, there are EU rules that are supposed to prevent this double-taxation, which should encourage cross-border investment and help unify the capital markets. But those rules are often a mess of red-tape and delays. In theory, either Germany or the Netherlands or both should give you a tax credit to pay you back for what they took out of their dividend. In practice, they may hold your money for years, or require you to jump through arbitrary hoops to get it back.

And so in the end many investors *don’t invest outside their own country,* not because they are small-minded or don’t want to, but because they’d pay twice as much tax as if they just invested in their own country. This again fragments capital markets, but governments are loath to unify the tax code like this because they still want to maintain full sovereignty over their taxes and budgets. And besides, if they unified the tax code, what would the rate of dividend tax be? 30-40%, like in Denmark and France? Or 0%, like in Slovakia and Slovenia? Everyone has arguments on what the rate should be, and no one wants to budge because there are good reasons for each argument.

In the end, I think a lot of online commentators undersell the difficulty of unifying Europe. Unification of the capital markets isn’t held back by small-minded nationalists, or sclerotic bureaucrats, it’s held back by the need for trade-offs which no government wants to make. No government wants to come to the people and say “we’re changing the laws on stocks and taxes, and we’re moving all the CSD jobs across the border.”

Leftists in France would revolt at any fall in capital gains tax, rightists and investors would do likewise for any rise in such tax in the EU’s many many low-tax jurisdictions. Emerging economies like Slovakia and Slovenia would cry foul at having to remove their competitive advantage in taxes to appease Denmark and the developed economies, Slovakia might think the only way they can attract investment is by having lower taxes than the more advanced economies of Europe.

So once again, trade-offs *exist*, and they are the reason Europe still hasn’t unified its capital markets.