The European Union is striving for a capital markets union, aiming for an integration that would further draw member states’ financial markets together and — ideally — result in a seamless flow of capital to spur economic growth.
Debates over the CMU have typically ended up pointing towards a banking union, because a pan-European banking merger between major players could help achieve these goals sooner. After all, most EU countries have their own national bank champions with some business spillover beyond the borders.
UniCredit's moves on Commerzbank, therefore, represent a seminal moment in the debate: a merger between two major European banks would be a grand test for the CMU, and would show how serious the EU is to have truly unhindered capital flows.
Such a pan-EU banking merger would mean integrating banking systems across jurisdictions, bringing synergies from improved operational capabilities and higher competitiveness. The perceived easier flow of capital between one country and another should ultimately lead to better distribution of that capital towards where it is most needed — regardless of whether it is done through bank lending, bond or equity markets.
A UniCredit-Commerz merger, or indeed any European merger on that scale, could create a stronger continental player and propel it to compete on the global banking scene. A merged entity would have more capital to lend and likely enjoy a lower cost of funding. Potentially, the first merger may also trigger a long-awaited wave of banking consolidation within Europe.
But this theory is not being reflected in action.
One step forward, one immense jump backward
Although the CMU integration initiative was launched back in 2015, only during the Covid-19 pandemic in 2020 did the EU push for a more concrete action plan. Fast forward four years, and the EU’s own words from 2020 that its “capital markets remain fragmented” still ring true.
But while concerted efforts have been made at the EU level, national or private sector efforts have been lacking — at least until recently.
In early October, EU finance ministers said that they welcomed an action plan by the European Investment Bank to support the development of the CMU. But the supranational lender, as impressive as it may be, cannot single-handedly bring member states' financial markets together. These efforts need private sector banks.
The most vocal political backing came in May, when French president Emmanuel Macron openly stated that, for the CMU to happen, long overdue European banking consolidation was essential.
After all, more developed financial markets are perceived to be better at allocating capital more efficiently. At the same time, the private sector has more business acumen than state regulators and knows how to make profitable initiatives. The same is true for banking — it’s just another industry, albeit a heavily regulated one.
In theory, if all relevant regulators deem there is no illegality or competitive hurdles between a banking merger, one should be greenlighted.
Reality, however, is far more complex, with political opposition a key stumbling block — as the case of UniCredit and Commerzbank shows. But if politicians are serious about their CMU ideals, they should be advocating for a major banking merger.
Look at how competitive scale enables US banks to dominate key European capital financings, or how Chinese lenders have entered the coveted German Schuldschein market as one of the key investor groups, for example.
The politicians within the EU member states need to get a grip. The EIB alone is not going to be a solution that will identify nascent technologies and nurtures unicorns, as a more developed capital market should.
Private sector at the core
In fact, if EU member states want to demonstrate that banks are the crown jewels of their economies and that they can truly be the conduit of capital, they need to let the mergers happen. National egos fuelled by political considerations have no place if CMU remains a goal.
The oomph of the private sector is largely missing from the EU's messaging, and this applies to the banking union. And without a banking union there will be no CMU.
By calling UniCredit’s public build-up of a stake in Commerzbank “an unfriendly attack”, German chancellor Olaf Scholz nearly slammed shut the door to the CMU. Consequent remarks from other German politicians are on the verge of completely shutting it.
German politicians are resorting to scaremongering tactics to thwart the acquisition, implying that, should Italian government debt balloon out of control, the banking sector — and by extension Commerzbank — would suffer. This goes against the general message from the European Central Bank that pan-European banking mergers can better allocate capital to the Union’s economy.
The political backlash at a national level against banking merger is in stark contrast to the theoretical benefits projected by technocrats at a centralised level, even though these were first preached at national levels.
Politicians across the EU need to reassess their priorities and what they want to achieve. If the CMU is still high up on their agenda, they must put cheap political statements second and prioritise the banking union.