The EU's zig-zag road towards stronger financial markets

Giles Merritt delves into the confusing welter of efforts to streamline Europe’s national financial players into a more dynamic single capital market

Are Europeans’ living standards condemned to the doldrums by fractious governments and self-serving bankers? High finance is notoriously murky, so public opinion has barely noticed the stalling of the drive to kick-start financial services and thus revive the EU’s flagging economy. 

Short-sighted self-interest is preventing cross-border link-ups of banks, insurers, stock exchanges and investment experts. If the EU had a unified financial industry everyone would benefit, but progress remains painfully slow. Back in the 1980s, Jacques Delors took aim at ‘eurosclerosis’, introducing the Single Market and eventually the euro, but he failed to achieve other key targets.

A naval metaphor best illustrates the feebleness of Europe’s financial firepower. America’s, and increasingly China’s, capital markets are battleships whose giant guns outrange Europe’s more numerous but smaller cruisers. The engagement has so far crippled some, and soon may sink others.   

Economics Commissioner Valdis Dombrovskis recently said the EU economy “remains resilient, with moderate growth”. The reality is that investment funds have been surging westwards across the Atlantic, reducing Europe’s available capital for funding the digital revolution.

European investors have lately flocked to place $5tn with Wall Street’s ‘Big Three’ asset managers – more than doubling the outflow of a decade ago. Europe’s more muscular financial players believe they can compete with US rivals if they can grow to a comparable size through mergers, but several bids of this sort have been scotched by protectionist ‘national interests‘.

Generali, the Italian insurance and asset management group, tried last year to merge with France’s Natixis.This potential rival to BlackRock, Vanguard and State Street was fiercely resisted by Italian competitors and by the Rome government. The same fate befell a takeover bid by Italy’s UniCredit for Commerzbank, the number two in Germany. Although Berlin wants to end Europe’s fragmented financial sectors – Chancellor Merz is urging the EU’s 30 equities markets to combine into a single stock exchange – the federal authorities blocked it.

Just as worrying is the failure to channel Europeans’ high rate of savings into investments in new businesses. Half of all EU households averagely save 15% of their incomes, amounting to a €14tn pool of capital.It’s a massive sum when compared to the EU’s total GDP last year of €22tn. But less than a third goes into investment vehicles of any kind, with the rest stolidly lodged in low-yielding bank accounts. Americans tend to put much less aside, but two-thirds of their savings are invested in stocks and shares and so fuel much healthier US growth.

Europe’s banks are happy with risk-averse customers. Their own healthy profits come from re-investing low-interest deposits into more profitable activities. Being risk-averse themselves, they starve small and medium-sized companies of loans, and this year have begun squeezing credit even tighter. The EU Commission is trying to encourage a shift into investment of the €10tn in cash held by the big retail banks, but it’s an uphill struggle.      

Risk is, needless to say, at the heart of Europe’s deadlock. The EU’s heterogeneity brings with it a myriad types and degrees of risk – ‘frugal’ northern countries hesitate to share the risks of potentially insolvent southern members. The scars of the 2010 sovereign debt crisis still bar the way to a common deposit insurance scheme that’s essential to the Capital Markets Union, and yet it has hung fire since 2015.   

The Commission and the European Central Bank are redoubling efforts to pull disparate financial services together.They hope the Savings and Investment Union (SIU) can help to lure more investors into bond markets. They are introducing the digital euro as part of a push to develop a pan-European credit card with the aim of loosening the grip of the US duopoly of Visa and Mastercard and revolutionising Europe’s creaky and expensive transactions systems.

Called the European Payments Initiative (EPI), it’s had mixed fortunes. In 2020, it attracted more than 30 banks with 40 million possible users. Two years later, two-thirds of them left, saying the project was over-ambitious and lacked sufficient backing by governments.EPI has since got a second wind, but its ‘Wero’ card launched in 2024 seems a shadow of the original plan.

The sheer variety of projects and the multitude of financial players makes it hard for outsiders to follow progress towards a more unified financial system. The picture is not entirely one of doom and gloom. The last ten years have seen Europe’s pool of capital grow by 14%, and in some sectors investment has risen by 40%.Less comfortingly, the EU’s GDP has slid from level-pegging with the US to only two-thirds of the American economy.

A higher profile for financial policy discussions, and a more determined effort to explain these in layman’s terms, would boost public awareness of these crucial questions. As ever, incoherent communication is the EU’s Achilles’ heel.

The views expressed in this Frankly Speaking op-ed reflect those of the author and not of Friends of Europe.