Directive action

Europe's fuzzy capital markets union takes shape

Europe's fuzzy so-called capital markets union may be taking shape. The European Commission is mulling a directive to harmonise member states' various insolvency regimes, Reuters reported on September 3. If common principles can be nailed down, CMU will begin to mean something.

Insolvency reform is one of the more ambitious topics included in the nebulous project championed by Commissioner Jonathan Hill. The project is intended to make the continent more resilient to shocks by smoothing the flow of capital across countries, and encouraging lending by non-banks.

Europe's patchwork of insolvency regimes is one big obstacle. The more disruptive or lengthy the insolvency process, the longer companies may delay writing off necessary debt, leading to misallocation of capital. And creditors will demand a premium for uncertainty in countries where they can't get a fair hearing.

The system is evolving. The ability of companies to shift jurisdiction has triggered competition, encouraging less creditor-friendly regimes to spruce up their laws to avoid losing out to more practical ones, such as the United Kingdom's. The financial crises of 2008 and 2010 made change more urgent, triggering reform in Spain, Italy and France among others.

The latest European proposals go a step further. They imply a clear obligation on countries to adhere to minimum common standards through a directive, according to a document obtained by Reuters. Ideally, that would involve setting clear guidelines, for example, on when creditors can enforce their rights, how to deal with those whose claims have no economic value but resist restructuring, and how to value companies in distress.

It's a challenging and even risky move. The differences go beyond legal drafting. The commission should focus as much on making sure judges in insolvency courts are sufficiently experienced and well trained, and that courts apply the principles consistently. And there's a danger that bad legislation could upset existing arrangements. The UK's scheme of arrangement, for example, is frequently used to restructure despite not being a formal insolvency procedure.

Given the challenges, the EC may face opposition. It's not clear whether Hill will be able to add much more on insolvency in his CMU Action Plan due later this month. But the commission appears at least to be on a glide path to something meaningful.