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Sources of Institutional Change: The Supranational Origins of Europe's New Stock Markets

Published online by Cambridge University Press:  13 June 2011

Elliot Posner
Elliot Posner
Affiliation:
George Washington University
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The article explains a curious turn in European political economies. Between 1995 and 2005 national financial elites in twelve Western European countries created almost twenty competing new stock markets designed to improve financing alternatives for entrepreneurial companies. For a region supposedly averse to risk and U.S.-style capitalism, it is surprising that most of the new markets were modeled on the U.S.-based Nasdaq Stock Market, an iconic American institution. The author's structured comparisons of the new markets to one another, to previous ones, and to proposals that never saw the light of day reveal that the primary causes behind the creation, form, and timing of Europe's new markets lie in the political skills, motivations, and actions of supranational European Union bureaucrats. Challenging leading social science explanations for the cross-border convergence of domestic institutions, these findings show that the accumulated effects of day-to-day action by these supranational bureaucrats are potential causes of institutional innovation. The argument adds to a growing body of detailed empirical research on the domestic and global impact of the European regional polity and contributes to scholarly debates about market formation.

Type
Research Article
Information
World Politics , Volume 58 , Issue 1 , October 2005 , pp. 1 - 40
Copyright
Copyright © Trustees of Princeton University 2005

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References

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4 Based on percentages of institutional versus household buyers, German households lost approximately sixty-five billion euros, as share prices on the Neuer Markt fell between April 2000 and May 2001, and French households lost approximately twenty billion euros on the Nouveau Marché during the same period.

5 “Germany Bristles at Capitalist ‘Locusts,’” International Herald Tribune, May 5, 2005, 1. Venture capital has thus far escaped the public attacks that have been directed toward other forms of private equity.

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21 Exceptions include Heritier (fn. 17).

22 Letters between chancellor of the exchequer and CISCO leader, available in CISCO historical files (London, March 1993).

23 The proposed Nasdaq copy was called the Enterprise Market (see Table 1). Speeches delivered by Cisco CEO Katie Morris during 1995 and 1996, available in CISCO historical files, London.

24 The Paris stock exchange was the Société des Bourse FrançAises (SBF-Paris Bourse), then the Parisbourse, and now, after its merger with the Amsterdam, Lisbon, and Brussels exchanges, Euronext.

25 The proposed Nasdaq copy was called Marché européen des Société Entrepreneuriales de Crois-sance, or MESEC. See Table 1. Chabbal (fn. 1); COB, “Le Second Marché” (Paris, 1992); COB and SBK, “Le Second Marché” (Paris, 1993).

26 Author interviews with Easdaq official, Leuven, April 26, 2000, and with EASD board member, Schwalback, May 12, 1999.

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29 “Playing by the Rules: How Neuer Markt Gets Respect,” Wall Street Journal, August 21, 2000, 1; Vitols (fn. 6); The main markets have now caught up. Since 2005 all publicly listed EU companies must report consolidated accounts in accordance with IAS/IFRS (Regulation [EC] 1601/2002, July 2002).

30 FIBV, Workshop: Financing Small and Medium-Sized Businesses for Future Growth. Proceedings (Milan, July 6–7,1995); Story and Walter (fn. 19). Author interviews with Easdaq official, London, May 3,1999; with Paris exchange executive, Paris, May 18,2000; and with European Commission official, DG2, Luxembourg, June 7,1999. Author telephone interview and written communications with FESE official, October 2004.

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36 Finnemore (fn. 11).

37 Simmons and Elkins (fn. 32).

38 Berger (fn. 7); DiMaggio and Powell (fn. 12).

39 Boyer (fn. 12).

40 DiMaggio and Powell (fn. 12).

41 For examples from the politics of finance literature, see Deeg, Richard, Finance Capital Unveiled: Banks and the German Political Economy (Ann Arbor: University of Michigan Press, 1999)CrossRefGoogle Scholar; Vogel, Steven K., Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca, N.Y.: Cornell University Press, 1996)Google Scholar. The sociology of markets literature makes parallel arguments. See Fligstein (fn. 13, 2001).

42 Pollack (fn. 18); Tallberg, Jonas, “The Anatomy of Autonomy: An Institutional Account of Variation in Supranational Influence” Journal of Common Market Studies 38 (December 2000)CrossRefGoogle Scholar.

43 Mazey and Richardson (fn. 17).

44 Barnett and Finnemore (fn. 14).

45 For a recent discussion of European Commission motivations and why scholars tend to make similar assumptions about them, see Pollack (fn. 18), 35.

46 Fligstein (fn. 13, 1997); Fligstein, Neil and Mara-Drita, Iona, “How to Make a Market: Reflections on the Attempt to Create a Single Market in the European Union” American Journal of Sociology 102 (July 1996)CrossRefGoogle Scholar; Alec Stone Sweet, Neil Fligstein, and Wayne Sandholtz, “The Institutionalization of European Space,” in Stone Sweet, Fligstein, and Sandholtz (fn. 11).

47 Barnett and Finnemore (fn. 14); Carpenter (fn. 15).

48 Heritier (fn. 17); Mazey and Richardson (fn. 17); Sandholtz and Zysman (fn. 17).

49 Bauer (17); Fligstein and Mara-Drita (fn. 46); Jabko (fn. 17).

50 Barnett and Finnemore (fn. 14); Stone Sweet, Fligstein, and Sandholtz (fn. 46).

51 I interviewed stock exchange executives, national government and European Commission officials, financiers and executives with the European Private Equity and Venture Capital Association (EVCA), International Federation of Stock Exchanges (which changed its name to the World Federation of Exchanges), the Federation of European Securities Exchanges, the City Group for Smaller Companies in London (renamed Quoted Companies Alliance), and the European Association of Securities Dealers in Brussels (which merged with the Association of Private Client Investment Managers and Stock Brokers).

52 EVCA retained its acronym but has since changed its name to European Private Equity and Venture Capital Association.

53 Bull EC (European Commission Bulletin of the European Union/European Community) 12–1981, 2.1.18, 1981; Bull EC 11–1982, 2.1.24, 1982; Bull EC 6–1983, 2.1.46, 1983.

54 Bygrave, William D., Hay, Michael, and Peeters, Jos B., eds., Realizing Investment Value (London: Financial Times/Pitman Publishing, 1994)Google Scholar; EVCA, Venture Capital Special Paper: Capital Marketsfor Entrepreneurial Companies (Zaventem: EVCA, 1994)Google Scholar.

55 Other less desirable options include sales to larger companies in the same industry (trade sale) or to other financiers.

56 Commission officials funded Easdaq through a nonprofit organization for this purpose discussed below. The European Commission (DG13) used resources from the second phase of the Strategic Programme for Innovation and Technology Transfer, 1989–93 (SPRINT), approved by the representatives of EU member state governments, which then extended the program for an additional year. See Council Decisions 89/286/EEC and 94/5/EC; Bull EC 1.2.144, 1993; Bull EC 2.1.69, 1989. DG23 gave funds from a multiannual program approved by the government representatives for small and medium-size enterprises, which ran from 1993 to 1996. See Council Decision 93/379/EEC.

57 Roger, Bruno and Faurre, Pierre, Rapport du Groupe de Travail “Nouveau Marche” (Paris: SBF-Bourse de Paris, February 1995)Google Scholar. Author interview with Trésor official, Paris, June 6, 1999.

58 David Mandell, “Alternative Investment Mood,” Cisco Voice (December 1997), 8–10.

59 “Nouveau Marché Rule Change,” Financial Times, October 30, 1996, 28.

60 Author interview with official from the former DG15, Brussels, June 2004. DG15's and the stock exchanges's opposition to the Easdaq initiative came out in the open during a FIBV conference. See especially the comments of Jose Fombellida, DG15 in FIBV (fn. 30).

61 Letters between Chancellor of the Exchequer and CISCO leader, March 1993, available in Cisco archives in London.

62 Author interviews with Trésor official, Paris, June 6, 1999; and DG13 official, Luxembourg, May 5, 2000.

63 Author's written correspondence with DG Enterprise official, May 8, 2001. See Council Decisions 89/286/EEC, 93/379/EEC and 94/5/EC.

64 European Commission, Towards a European Stock Exchange, XV/231/81 (Brussels: November, 1980).

65 Story and Walter (fn. 19).

66 They were Raniero Vanni d'Archirafi (Italy) and Christos Papoutsis (Greece).

67 Heinrich von Moltke, “The Role of DG XXIII with Regard to EASDAQ” (Paper presented at the conference “EASDAQ;—The European Stock Market for Growing Companies,” Brussels, June 26, 1996).

68 “Bourse Tightens Rules on Market,” Financial Times, July 23, 2001, 16.

69 Prime Market continues to make stock market financing available to young companies but is not exclusively for them. Its creation followed the Euronext exchange's 2002 launching of the Next-Economy market.

70 In creating the Alternext Market, the Euronext exchange borrowed the AIM model whereby local intermediaries back listed firms and thereby send signals to investors, keeping costs down. See Euronext, “Alternext: A Tailor-Made Market for Small and Mid Caps” (Paris, 2005).

71 The U.S. Nasdaq and large international banks became interested only once the new market competition was under way. The Deutsche Boerse did commission McKinsey to advise on how best to respond to Easdaq, AIM, and the Nouveau Marché. But McKinsey and other global consulting firms were not key actors. Author interviews with Merrill Lynch economist, Frankfurt, May 13, 1999; managing director of Morgan Stanley Dean Witter, London, April 1999; and Deutsche Boerse executive, Frankfurt, May 2000.

72 Fn. 28.

73 The organization and labels for the European Commission's divisions, directorates-general, have since changed. The subdivisions that strongly promoted the Nasdaq form were Innovation, DG13, and Small-and-Medium-Sized Enterprises (sMEs), DG23.

74 European Commission, “The Community and Industrial Innovation” (Brussels: Commission of the European Communities, 1978); European Commission, “European Venture Capital Pilot Scheme,” DG Information and Innovation, EUR 9082 EN-FR final, (Brussels, 1984); author interview with European Commission official, DG Enterprise, Innovation Policy, Luxembourg, May 5, 2000.

75 European Commission (fn. 74, 1984).

76 See Nugent, Neill, “At the Heart of the Union,” in Nugent, Neill, ed., At the Heart of the Union: Studies of the European Commission (New York: St. Martin's Press, 1997)CrossRefGoogle Scholar; Sandholtz and Zysman (fn. 17).

77 Fn. 45.

78 European Commission (fn. 74, 1978); European Commission, “Prospects for the Creation of a European-Level Capital Market for Entrepreneurial Companies” (Meeting with the press, in preparation for June 21, 1994, Brussels); European Commission, “Reporting on the Feasibility of the Creation of a European Capital Market for Smaller Entrepreneurially Managed Growing Companies,” COM(95)498 (Brussels, 1995). See also European Commission documents COM(83)277, 1983; EUR 9082, 1984; EUR 9756, 1985; EUR 1152, 1990 and COM(93)528, 1993. Author telephone interview with official from the former DG13, May 4, 2000. Author interviews with officials from the former DG2, Luxembourg, June 7, 1999; and with the former DG15, Brussels, June 8, 2004. Author's written correspondence with DG Enterprise official, May 8, 2001.

79 Von Moltke (fn. 67), 4.

80 European Commission (fn. 64); ELB Associates and Consultex, The Feasibility of Creating ECU-EASD: A European Association of Securities Dealers to Trade over the Counter in ECU-denominated (Geneva, 1985)Google Scholar. Author interviews with an official who opposed giving subsidies to Easdaq from the former DG15, Brussels, June 2004; with a former executive of the Amsterdam stock exchange, Brussels, June 8, 2004; and with an executive of the Paris stock exchange, Paris, May 18, 2000.

81 European Commission (fn. 64).

82 There were four previous proposals for pan-European Nasdaq copies: ECU-EASD (1985), European OTC Market (1989), European Securities Market (1989), and MESEC (1994).

83 Council Directive 93/22/EEC.

84 Article 15.5 is the main source of ambiguity concerning stock exchange competition. Steil, Benn, Regional Financial Market Integration: Learning from the European Experience (London: RJIA, 1998), 40–43Google Scholar; and Story and Walter (fn. 19), 21–22, 266–69.

85 The 2004 Markets in Financial Instruments Directive or MiFID (Directive 2004/39/EC of the European Parliament and Council of the European Union) repealed the ISD.

86 Stone Sweet, Fligstein, and Sandholtz (fn. 46).

87 Weber, Steven and Posner, Elliot, “Creating a Pan-European Equity Market: The Origins of EAS-DAQ” Review of International Political Economy 7 (Winter 2000), 545CrossRefGoogle Scholar.

88 European Commission (fn. 78, 1995), 7.

89 In March 2001 the Nasdaq bought Easdaq, changed its name to Nasdaq Europe, and then closed it in November 2003. Jos Peeters purchased Nasdaq's controlling interest in Nasdaq Europe in December 2003 and has recently sought to revive the Easdaq idea. See www.Easdaq.be.

90 I use Quinn's widely used measure of openness in combination with the new Kastner and Rector measure. While Quinn's measure gives annual openness scores for each country, the Kastner and Rector measure, also based on IMF data, identifies by month and year any major changes in government policies. Quinn, Dennis and Inclán, Carla, “The Origins of Financial Openness: A Study of Current and Capital Account Liberalization” American Journal of Political Science 41 (July 1997)CrossRefGoogle Scholar; Kastner, Scott L. and Rector, Chad, “International Regimes, Domestic Veto Players, and Capital Controls Policy Stability”, International Studies Quarterly 47, no. 1 (2003)CrossRefGoogle Scholar.

91 Council Directive 88/361/EEC.

92 Author telephone interview with former secretary general of EVCA, April 27, 2000; EVCA (fn.54).

93 Anslow, Maurice, “‘EPEE’, ‘PAREX’, ‘NASDAQ’ or ‘EASDAQ’?” European Venture Capital Journal 26 (February-March 1993), 1Google Scholar; Jos B. Peeters, “A European Market for Entrepreneurial Companies,” in Bygrave, Hay, and Peeters (fn. 54).

94 Author telephone interview with former EVCA executive, April 27, 2000.

95 Ibid.

96 Author interview with Jos Peeters, Leuven, April 26, 2000.

97 Fn. 80.

98 Author telephone interview with official from the former DG13, May 4, 2000; author and Weber's interview with commission officials from the former DG23, Brussels, June 1997; Weber and Posner (fn. 87).

99 European Commission (fn. 78, 1994 and 1995). See Commission-funded studies: Coopers & Lybrand, “Corporate Finance: EASDAQ;—a New Opportunity?” (London, 1995); “New Survey Shows Need for European Over-the-Counter Securities Market, Information Bulletin, December 23, 1985” (Brussels: EVCA, 1985).

100 For the linkages between rationality and norm-based behavior, see Finnemore, Martha and Sikkink, Kathryn, “International Norm Dynamics and Political Change” International Organization 52 (Autumn 1998)CrossRefGoogle Scholar; Sell, Susan K. and Prakash, Aseem, “Using Ideas Strategically: The Contest between Business and NGO Networks in Intellectual Property Rights” International Studies Quarterly 48 (March 2004)CrossRefGoogle Scholar.

101 Correspondence between Eugene Schulman and Jacque Delors, January 14, 1985. Author interview with Eugene Schulman of ELBAssociates and Andrew Sundberg of Consultex, Geneva, May 8, 2000. ELBAssociates and Consultex (fn. 80); “OTC Market for Europe Gains Support,” Wall Street Journal, December 23, 1985,11.

102 See ELBASSOCIATES, Consultex, and Scottish Financial Enterprise, Creating the European Association of Securities Dealers and an Integrated European Securities Market: A Proposal to Manage a Programme for the European Commission (Geneva, September 1989)Google Scholar.

103 Author interviews with former EVCA official, London, April 1999; and with official of the former DG2, Luxembourg, June 7, 1999. Written communication from DG Enterprise official, May 8, 2001.

104 The official external regulator was the Belgian Banking and Finance Commission.

105 Author telephone interview with former EVCA executive, April 27, 2000.

106 Author interview with former EASD official, London, April 26, 1999.

107 The European Commission's Secretariat General's office headed the group that included DG2 (Economic Affairs), DG13, DG15, DG16 (Regional Policy), DG28 (Credit and Investment), and DG23.

108 Scottish Financial Enterprise notes from meeting between Andrew Sundberg, Eugene Schulman, SFE and the Commission's Inter-DG Working Group, Brussels, October 11, 1989; author interviews with Eugene Schulman of ELBAssociates and Andrew Sundberg of Consultex, Geneva, May 8, 2000.

109 This is despite the London market's impressive record in attracting non-European companies. See “Why Aim Is Foreign Target of Choice,” Financial Times, September 3, 2005, 3.

110 Barnett, Michael and Duvall, Raymond, “Power in International Politics” International Organization 59 (Winter 2005)CrossRefGoogle Scholar.

111 Thelen (fn. 8).

112 For a comprehensive treatment of what he calls a political-cultural approach, see Fligstein (fn. 13, 2001).

113 Ibid., 67–98.