Sunday, January 07, 2007

What Europe needs is a more dirigiste stock market

Well, at least that's what Georges Ugeux seems to think. In his recent op-ed in the Financial Times (Exchange battles mask Europe's silence), Ugeux suggests that the European Commission is falling down on the job by allowing U.S. stock exchanges to buy up Euronext and the London Stock Exchange instead of (subsidizing? mandating? prohibiting the alternatives?) a true pan-European exchange to compete with the U.S. Ugeux asks, since the profits of the London Stock Exchange, Euronext, and Deutsche Börse are higher than NASDAQ or the New York Stock Exchange, why is the exchange merger impetus coming from the United States instead of Europe? He also asks why U.S. stock exchanges are trading at price/earnings ratios of 50:1 while European p/e ratios are closer to 20:1. All of which leads the this conclusion:

It is extraordinary that neither the European Commission nor Ecofin, the committee of European finance ministers, have encouraged the European exchanges to get together. Is it no matter to Europe that two of its largest equity markets will be owned by US stock exchanges? Would this not affect the internal market? Does the CME-CBOT merger not threaten the European derivatives market?


There is certainly a risk of US dominance on the regulatory front. The absence of consideration for the basic rules of international private law led to regulatory overreach beyond US borders. The Sarbanes-Oxley Act of 2002 extended its jurisdiction to non-US companies. It might happen again.

It happened before. In the 1950s, America’s interest-equalisation tax dried up the US foreign bond markets, which shifted from New York to London in the same way listings have been affected by SOX. The law changed, but the bond market never returned to New York. The European teams of the US investment banks years ago ceased promoting the US capital markets. They have used SEC Regulation S and Rule 144a to reach US institutional investors without registration with the Securities and Exchange Commission.

Will the efforts of Hank Paulson, the US Treasury secretary, convince the Congress in time to avoid a structural lack of competitiveness in the US capital markets?


The eurozone badly needs deeper and more fungible pools of liquidity if it wants to compete effectively with the US. That is why the silence of European authorities on what is in effect a fundamental policy issue is so loudly heard. Could this be a wake-up call?

Granted, I cut out some stuff in the middle, but if you read the article you can tell I didn't cut out much of substance. Which means either the FT did a hatchet job editing Ugeux's article, or he can't string together a coherent argument to save his life. (And that's putting aside his line about how the Sarbanes-Oxley Act violates basic rules of private international law. I don't see how a law violates these "rules" when it only effects issuers deliberately participating in a jurisdiction's market.)

First, if the Americans have screwed up their regulation so badly, why is Europe at risk of being dominated by U.S. exchanges and U.S. regulators? Second, don't you think there's a reason that U.S. exchanges trade at a substantial premium to their European competitors? Rather than "financing their own takeover," doesn't it seem more likely that European exchanges are trading so cheaply because investors believe they are poorly run or have comparatively low future prospects? And, third, if the Eurozone badly needs deeper and more fungible pools of liquidity, how is a EU-subsidized exchange going to create that liquidity? Liquidity is created by investors. Exchanges are just the platforms upon which the liquidity crystalizes. Even as U.S. exchanges seek merger partners, they are also facing new competitors as electronic communications networks (ECNs) and alternative trading systems (ATS's) spring up. If anything, this has seemed to increase liquidity on the U.S. market.

Ugeux's article only makes sense (and even here I'm being kind) if you believe that the government must play a central role in promoting and guiding capital markets, rather than acting as a policeman to make sure nobody cheats. And it's precisely that kind of dirigiste thinking that has Europe playing catch-up today.

1 comment:

ungenannter said...

Thank you for your use of common sense in a debate clouded by misplaced jingoism. I would add that European authorities' efforts would be better employed breaking down the barriers to trading, such as deplorable clearing and settlement charges, illogigal taxes (e.g. stamp duty, double/triple taxation on company earnings).