Europe’s Financial Ambitions Stop at National Borders
The October 9 Ecofin deal shows how governments’ defence of national supervisory powers is holding back the integration of Europe’s capital markets. A commentary by Lorenzo Bini Smaghi
What happened at the meeting of EU finance ministers on October 9 offers a telling illustration of how and why Europe has so far failed to establish itself as a global economic power on a par with the United States and China.
The discussion focused on integrating Europe’s financial markets to help companies grow and finance the investments the continent needs in artificial intelligence, the climate transition, defence and infrastructure, while better protecting Europeans’ savings.
The need for greater integration had been highlighted in the Letta and Draghi reports and repeatedly reaffirmed by the European Council.
The finance ministers of the EU’s six largest economies had recently written to the European Commission calling for concrete proposals.
The Commission put forward a series of measures, notably to strengthen the European Securities and Markets Authority, ESMA, whose next chair, Carlo Comporti, has just been apointed.
Stronger European supervision is needed to prevent national authorities from interpreting EU rules differently, a practice that has contributed to market fragmentation.
When the Commission’s proposal came before ministers and technical officials, the battle began to weaken it. The objective was to preserve the remaining powers of national authorities.
The barely concealed aim was to give domestic markets and operators an advantage over their competitors.
The justification was that national specificities and expertise had to be preserved, particularly for infrastructure without a pan-European presence.
The result is a watered-down version of the Commission’s original proposal. Under the compromise, the number of trading venue groups that would come under ESMA supervision falls from 12 to 8, with the notable exclusion of the German and Spanish stock exchanges.
The number of central counterparties falls from 9 to 6, and central securities depositories from 15 to 13. The proposed scope of European supervision is thus sharply reduced.
As if remaining outside the European system conferred some sort of privilege. The experience of banking union shows, rather, that institutions remaining outside direct ECB supervision, as many German savings banks do, ultimately suffer a disadvantage.
Deutsche Börse and the companies listed on its exchange will gain nothing from remaining under the supervision of Hesse’s exchange authority and BaFin, Germany’s financial regulator. Quite the opposite.
How did this happen?
Although heads of government had broadly agreed on the goal of creating a more integrated European financial market, once negotiations moved to the level of technical officials, the instinct to preserve the powers of national bureaucracies took over.
As the English saying goes, “Turkeys don’t vote for Christmas.” In other words, if decisions about transferring powers are left to those who stand to lose them, nothing gets decided.
No one wants to surrender even the little power they have, national regulators included. They will try everything they can to throw a spanner in the works of European integration.
This is just one example of how difficult it is to build a stronger Europe when decisions are entrusted to those who stand personally to lose from them, at the expense of the wider public interest.
None of this is new.
The euro would never have been created had the decision been left to the member states’ central banks, each determined to preserve its power to issue its own currency.
It took the vision and determination of the political leaders of the time, from Helmut Kohl and François Mitterrand to Giulio Andreotti and Felipe González, who overcame their differences at the European Council in Rome in October 1990 and succeeded in isolating Margaret Thatcher, who opposed the project. Such determination and courage are in short supply among Europe’s leaders today.
Yet more than a quarter of a century after the euro’s launch, the overwhelming majority of citizens regard it as a success. No one wants to return to the old national currencies, not even Germans to the Deutschemark.
Europe’s paralysis benefits no one.
On the contrary, in a global competition, financial fragmentation not only prevents European companies from growing but also pushes them to relocate and seek a listing across the Atlantic, to Wall Street.
The management of Europeans’ savings is largely outsourced to major US financial groups, which move easily between European markets, following criteria and objectives set in the US.
If Europe is slow to act, the blame lies with the short-sightedness of its member states. And with those who govern them.
A previous version of this article was published in the Italian daily Il Foglio
IEP Bocconi 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.
