Playing the long game

European exchange operators may despair at recent GDP growth figures, but long-term trends may still work out in their favour.

Both French and Eurozone GDP growth was stagnant in Q2 2014, while Germany – the engine of the Eurozone economy – recorded a GDP growth of -0.2% and a large fall in output.

European Central Bank (ECB) president Mario Draghi, lauded pulling the Eurozone back from the brink of collapse, is struggling to put the 18-country single currency block back on the path to sustainable economic growth. Much as he might wish to follow UK and US footsteps to recovery through quantitative easing, Germany’s insistence on fiscal discipline leaves him less room for manoeuvre than Mark Carney or Janet Yellen. The ECB may have announced that BlackRock is advising it on a strategy for buying asset-backed securities, but it remains highly unlikely that this week’s deliberations in Frankfurt will lead to asset purchase programmes on anything like the scale orchestrated by the Bank of England and the Federal Reserve. 

Such macroeconomic uncertainty is not what you need when running a business, for example equity issuance and trading, designed to fuel economic growth and which feeds on business and investor confidence. It is perhaps less welcome still if – like Dominique Cerutti, CEO of Euronext – you are masterminding the transition of four national stock exchanges into an independent, multi-asset, pan-European business.

One reason for a lack of economic growth in the Eurozone is that its banks aren’t lending. Only last week it was announced that private sector lending by Eurozone banks fell again in July, by 1.6% year-on-year. 

This is partly due to new capital rules which impose a high tariff for lending to riskier credits (which includes mid-tier firms), as well as a post-crisis bunker mentality which has resulted in widespread cross-border retrenchment by many banks. Lending to firms beyond your non-core markets is simply seen as unacceptably risky by many banks, especially when several aspects of the regulatory landscape are still evolving.

In terms of near and present dangers to European banks, the most significant has to be the stress tests and the asset quality review assessments being pored over by Frankfurt-based analysts ahead of the ECB taking up its new role as chief regulator of euro-zone banks in November.

Many fear that a number of banks’ balance sheets still hide toxic assets amassed in the sub-prime mortgage crisis. The picture will be much clearer when the ECB publishes the results of its Comprehensive Assessment in the second half of October.

Not that Europe’s banks can return to a business-as-usual mentality after that.

The structural reforms to the European banking sector proposed by the European Commission following the Liikanen report, proposed in Q1 2014, may further change the character, structure and risk appetite of banks even further before their scheduled introduction in 2017 and 2018.

In a report published last week, KPMG voiced concerns that the European financial sector reform agenda needed to be re-evaluated “to avoid a serious risk to businesses, jobs and economic growth”. KMPG called on the new European Commission and the new European Parliament to rework their reform plans in light of the need to stimulate jobs and growth.

Of the five specific measures recommended by KPMG, the first – Develop EU capital markets – will have brought nods of agreement from exchange operators and market participants alike.

“Identify and remove restrictions holding back dynamic and innovative capital markets in the EU,” the KPMG report recommended. “Complete the minimum harmonisation of national legislation and tax systems necessary to support efficient and effective EU capital markets.” 

It is worth noting that the financial crisis interrupted the first steps of what was always going to be a long-term process, the creation of standardised rules for capital markets across Europe.

Speaking at TradeTech 2014 in Paris earlier this year, Euronext’s Cerutti asserted: “I see this new era as being very positive for the capital markets of Europe in particular, marked by the beginning of new opportunities that I hope are here to stay in the decade to come.” 

In the Q3 2014 edition of The TRADE, one of the highlights will be an interview with Cerutti, in which I hope to report on how those opportunities are shaping up – over the long term.