IS THE CAPITAL MARKET IMPORTANT FOR THE ECONOMIC GROWTH IN THE EU?

The European Commission’s plan to mobilize the capital in Europe by launching the project of the Capital Markets Union, expected to be accomplished by 2019, is strongly based in the characteristics of the European financial system, relying heavily on the banking industry. The importance of capital markets and financing venues was emphasized by the financial crisis that started in 2007, seriously affecting the banking industry, and whose effects can also be seen today. In this article, we analyse the relationship between economic growth and some variables that characterize the capital markets in the 28 member states of the European Union. We use annual data for the 2000-2015 time frame, in order to capture the multiple economic cycles in Europe, corresponding to each of the 28 member states at the beginning of 2017 (even though the accession to the EU occurred later than 2000, as is the case of Central and Eastern European countries). We used data reflecting economic growth, stock markets returns, market capitalization as percentage in GDP and stocks traded value as percentage in GDP. We start the analysis by checking the existence of some causality relations between the analysed variables, by conducting a pairwise Granger causality test. The results show that the variables characterizing the capital markets are in the Granger causality relation with the economic growth. We also use the panel data regression to find a relation between the selected variables, and the obtained results. The conclusion reveals the existence of a positive relation between the economic growth and the other three variables, for the selected countries and time period. These results reveal the importance of the capital market as a way of financing companies throughout Europe, as the market capitalization (the size of the capital market) and traded value (as a measure of liquidity and activity in the capital market) are directly related to the economic growth. Stock market returns are also positively related to economic growth, a result that shows the potential use of the first variable as an indicator of the future economic trends. These results are of importance for a diverse scale of users, from individual investors, to institutional investors (more interested in the development of capital markets and mechanisms), but also for decision-makers from each and every member state and European institutions, involved in shaping and implementing the Capital Markets Union plan.