A European Supervision is Necessary but not Sufficient to Integrate Financial Markets
The Commission’s proposal to strengthen ESMA is exposing national-level resistance to deeper integration. A commentary by Lorenzo Bini Smaghi
For years, people have complained about Europe’s inability to build an integrated financial market – one of the essential conditions for sustaining the continent’s competitiveness and strategic autonomy. In principle, everyone seems to agree on the objective, including the heads of state and government of the 27 member states; yet in practice, progress remains elusive.
A recent case helps explain why.
On 2 November, the Financial Times reported on a draft plan by the European Commission to extend to ESMA – the European Securities and Markets Authority – direct supervisory powers over Europe’s financial market infrastructures, including stock exchanges, cryptocurrency trading platforms, and clearing houses.
The initiative, requested by the European Council, seeks to improve companies’ access to different forms of financing and to avoid pushing them to cross the Atlantic in search of deeper and more efficient markets.
Europe’s financial market is indeed highly fragmented. It is overseen by dozens of national and regional supervisory authorities and relies on hundreds of trading and post-trading platforms. This fragmentation increases the cost of cross-border operations and represents a significant obstacle for start-ups seeking to scale up across the EU.
The need to strengthen the European authority has been underlined by many, not least ECB president Christine Lagarde. The political timing looks favourable. Even German Chancellor Merz has recently spoken in favour of greater financial integration.
Perhaps this is precisely why opponents of the project have come out into the open faster than usual.
Luxembourg’s finance minister, for example, has declared that his country supports “the convergence of national supervision” rather than “a centralised, costly and inefficient system”.
This is obviously a pretext.
It recalls the debates of the 1980s on monetary union, when opponents – particularly in Germany – argued that the convergence of national economies would be sufficient to deliver monetary convergence and exchange rate stability.
The objective was to postpone decisions and thus avoid adopting a single currency.
The same tactic was later applied to banking supervision, which remained a purely national competence until the European crisis of 2011–12, with the same argument advanced by the very authorities of the member states: better coordination would suffice.
In reality, as long as supervision remains a national competence – even in the presence of a single rulebook – the market remains fragmented, because each authority interprets the rules in its own way.
The Luxembourg finance minister, who is often backed by his Irish counterpart and by several governments in northern Europe, is not entirely wrong, however, to raise the question of efficiency and the costs associated with supervision.
This is concern is well present in some countries, where the mandate of public authorities covers not only financial stability but also market competitiveness and the efficiency of procedures.
These considerations are too often forgotten at the European level. For example, the Single Supervisory Mechanism for banks, located within the ECB, has a single objective: stability, apparently at any cost. Questions of efficiency and competitiveness seem to lie outside its remit. As if they were not concerned.
It is therefore up to the EU’s political institutions, starting with the European Commission, to take up the challenge and to insist – even by amending the statutes of supervisory authorities such as ESMA – that efficiency and competitiveness become core criteria of the new single supervisory system for financial markets.
This would also help address the concerns of some financial operators. As the FT article itself reports, the investment funds’ association opposes an extension of ESMA’s remit on the grounds that it would increase costs for private operators.
In reality, the largest investment funds, especially non-European and primarily US ones, benefit from being able to engage in regulatory shopping across Europe, choosing to locate in countries such as Ireland or Luxembourg where supervision is apparently more efficient, less burdensome, and possibly more accommodating. This is a privilege no other market grants to foreign operators.
Integrating the supervisory system is a tool for reducing disparities in treatment. But on its own, it does not guarantee that fragmentation will diminish or that markets will integrate. The banking sector illustrates the point: fragmentation has not dimished – indeed it has increased over the past decade – in spite of banking union.
Unless European authorities are given a clear mandate that goes beyond stability at all costs and explicitly includes the efficiency of their actions and the competitiveness of the system as a whole, the integration of Europe’s financial and banking markets will never happen.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
