Autumn 2022

Advancing EU’s open strategic autonomy best response to geopolitical challenges

An open strategic autonomy must be ensured in the financial sector, writes Gediminas Šimkus, chair of the board, Bank of Lithuania.

Russia’s brutal war against Ukraine has created new geopolitical and economic challenges with many uncertainties, high energy prices, risks to the energy supply, slowing growth and rising inflation. There is a move towards less trade with geopolitically more risky countries, aimed at greater independence in the production of essential goods, more secure provision of essential services and enhanced digital sovereignty.

The concept of strategic autonomy is gaining traction in all European Union policy arenas. As the EU strives for reduced dependencies on third parties, together with a deeper integration among its members, it must avoid protectionism and aim for an open strategic autonomy. The financial sector is one of the key areas in which such an open strategic autonomy must be ensured.

The EU’s financial sector is very open internationally. Openness spurs competition. However, Europe’s financing model is still heavily skewed towards bank financing. Too few European companies go public and capital markets in many member states are underdeveloped. Excessive reliance on third-country critical service providers, such as central counterparties clearing derivatives and third-country digital technologies, creates risk in times of market disruption. Steps must be taken to tackle such vulnerabilities.

To this end, there is a compelling need to complete the capital markets union, as one of the prerequisites for achieving European strategic autonomy in the financial sector. A deep and complete CMU is not a goal in itself but rather a vital element in delivering on the key economic policy objectives of the post-pandemic recovery and overcoming economic challenges related to the increasingly complex geopolitical situation. It will also help ensure that the transition towards both a more digital and more sustainable economy is a success.

Well-developed capital markets can offer an attractive alternative for firms operating in bank-based financial structures. Small- and medium-sized enterprises in countries where capital markets are less developed cannot access capital from developed markets unless they are business prodigies. SMEs therefore have to rely on bank funding. It is no secret that banks are less eager to finance investments directed towards innovative technologies, including innovative green technologies.

‘Well-developed capital markets can offer an attractive alternative for firms operating in bank-based financial structures.’

The current geopolitical situation highlights that the only sustainable way to reduce our reliance on imported fossil fuels is to move fast with the green transition. Lithuania started shifting away from Russia’s market after the annexation of Crimea in 2014 and invested in the development of critical energy infrastructure, namely the Klaipėda liquid natural gas terminal. This allowed Lithuania to completely stop imports of Russian gas in response to Moscow’s invasion of Ukraine.

However, Lithuania will only achieve full energy independence when it successfully boosts the capacity of local green energy production. This transition will be neither fast nor smooth without an environment in which investments towards innovative green technologies are encouraged. Lithuania must boost the growth of the entire financial sector by increasing competition and access to services, as well as strengthening the capital market, thereby creating high added value for citizens, businesses and the economy in general.

The development of local and regional capital markets is only the first step towards deeper European cross-border capital markets. Without the free flow of capital and savings across EU member states, efforts to foster green innovation and Europe’s resilience to future shocks will only yield limited results.

Any actions towards deeper EU integration should be horizontal and broad rather than national or regional. Ensuring Europe’s strategic autonomy in the financial sector requires strong political support and a willingness to make EU-level reforms on sensitive issues such as taxation and insolvency. Open economies always gain when regulation is harmonised and calibrated equally. At the same time, smaller economies tend to lose out when the national champions are chosen to compete in strategically sensitive sectors internationally, because then possibilities for product customisation become limited.

A deep single market for capital, complemented by the integration of banking markets, is of utmost importance if the EU is serious about the acceleration of economic growth and strategic autonomy. However, there must be an appropriate balance between achieving such economic and financial autonomy, on the one hand, and maintaining openness and global co-operation with like-minded partners to reap the potential benefits, on the other. The EU must continue working with its strategic partners to achieve an open and stable international economic ecosystem against the background of profound changes to the global order. Experience has shown that coping with such changes takes time, leadership and stamina.

The EU’s role as a global standard setter is a key part of its toolbox as it promotes global co-operation based on European values. Data collection, management and protection is one such area where the EU could demonstrate its prominence. Through such initiatives as the European Single Access Point or the creation of the consolidated tape for transactions taking place on trading platforms across the EU, European companies will be made more visible, accessible and comparable. Combined with an interconnected and open technology sector in Europe, such initiatives will provide the continent with a strong foundation on which to set global standards, as well as to maintain and expand Europe’s economy.

Advancing the EU‘s open strategic autonomy in the financial sector is key if Europe is to overcome challenges, meet its financing needs in the long term and ensure the prosperity of the continent’s economy. With joint effort and innovative thinking, Europe will be able to successfully adjust to the new geopolitical reality. There is no other choice.

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