EU capitals are traditionally reluctant to cede powers to Brussels. But recent events suggest there’s one thing they hate even more – handing over powers to Paris.
For years, EU officials have encouraged member states to hand over supervisory powers to the European Securities and Markets Authority (ESMA), the bloc’s capital markets watchdog. Their efforts have mostly failedfor a very simple reason: member states i hate the idea.
With one notable exception: France.
The EU’s second-largest economy is one of the bloc’s staunchest supporters of integrating the bloc’s deeply fragmented capital markets. It also has repeatedly expressed disappointment in Europe’s long-stalled push to channel trillions of euros worth of private savings into growth-boosting investments: the main goal of ‘Savings and Investments Union(SIU).
But Paris’ approval of centralized supervision of major financial players – including stock exchanges, central securities depositories and asset managers – has also raised suspicions in other EU countries that something else could be going on. Is it a coincidence, they ask, that ESMA is based in the French capital?
Many believe it is not.
“The French would not support central supervision, or at least not so strongly, if ESMA was not in Paris,” says one EU diplomat. (Hint: they’re not French.)
But is this true? Are the Brussels bureaucrats really cooperating? the vile French to secretly gain oversight of countries’ financial systems? And is the issue of central oversight a distraction from more important reforms, such as EU renewal the securitization market or creating new ones savings productsas Prime Minister of Luxembourg recently suggested?
There are good reasons to think that the answer to all these questions is NO.
For one thing, experts largely agree that centralizing oversight is a critical step toward creating the SIU—which, according to Commissionit could generate up to €470 billion of additional private investment per year, or 2.5% of the EU’s total output.
“Surveillance shapes markets,” says Nicolas Véron, a senior fellow at Bruegel, a Brussels-based think tank. “If you have fragmented oversight, you have fragmented markets. If you want integrated markets, you need integrated oversight.”
The former Italian prime minister gave similar reasons Mario Draghi to propose turning ESMA into a European version of the Securities and Exchange Commission (SEC), America’s powerful financial watchdog, in its landmark 2024 report on the EU economy. This idea is also supported by European Central Bank – where Draghi previously served as president and incidentally, is based in Frankfurt, not Paris (although admittedly it is now run by a French woman).
Moreover, the push to centralize supervision at ESMA recently gained support from other major EU economies, namely Germany, Italy, Spain, Poland and the Netherlands – which, along with France, are collectively known as ‘E6‘. If strengthening ESMA’s powers is a French trick, why have Berlin, Rome, Madrid, Warsaw and The Hague apparently fallen for it?
The notion that the centralization of surveillance is a French trick “is a bit silly,” Véron argues.
“The view that ESMA is massively skewed in its decisions and behavior by being in Paris is not well supported,” he adds. “Having said that, I think it’s true that the French are more constructive on this issue. They have a sense of pride and ownership that makes them more positive about the idea of policy centralization than they would be if ESMA were in Frankfurt.”
RALLYin other words, is not equal to Machiavellianism.
A capital proposal
However, there are many reasons for caution – and concern.
One is the sheer complexity of what the European Commission has proposed.
The Brussels legislative text, unveiled in December last year and officially known as Market Integration and Surveillance Package (or ‘MISP’), calls for sweeping changes to ESMA’s supervisory powers and governance structure.
In particular, the MISP would move the supervision of all “significant” central securities depositories, central counterparties and trading venues to ESMA, along with all crypto asset service providers. It would also introduce a new independent Executive Board, made up of five members, which would be responsible for taking ESMA’s most important decisions.
Even more complicated than the proposed changes, however, is how they are proposed. Spanning 500 pages, the Commission’s legislative package consists of three legislative proposals that, together, amend or repeal 14 EU regulations and five directives.
Karel Lannoo, CEO of the Center for European Policy Studies, another Brussels-based think tank, EVIDENCE that the package is so complicated that the Commission itself miscalculated how many laws MISP would ultimately affect. (He counts 19, instead of 18.)
The complexity of MISP also means that the Commission’s aim to finalize the package by the end of this year is “unrealistic”, argues Lannoo.
“This is the biggest single ‘Omnibus’ package out there right now,” he says, referring to it cross-sectoral ‘simplification’ initiative currently favored by Brussels. “19 laws. My God.”
Financial horse
Politics is, as always, another potential obstacle.
At a meeting in Brussels earlier this month, delegates from the E6 presented a non-paper detailing their proposal for centralizing oversight to representatives from the other 21 member states. The move caused a lot of confusion and even anger from many smaller countries, according to several people familiar with the matter.
Apparently, they are right to worry: among other things, the group’s non-paper is proposed excluding German crypto trading venues from ESMA supervision – prompting suspicions that a deal may have been stopped by E6.
“I think there is horse trading,” Lannoo says. “I understand that, and you get it.”
But not everyone agrees – or, at least, agrees that this is a problem.
“I personally… don’t believe this is necessarily a bad thing,” said an EU official from a non-E6 country. “Groups of member states create alliances to promote their interests. This is part of the dialogue.”
France, too, has sought to downplay accusations that it is trying to lead smaller member states. “I want everyone to hear it: this (E6 statement) is a contribution to our collective work and certainly not a take-it-or-leave-it position,” said Roland Lescure, the country’s finance minister, during yesterday’s meeting of EU finance ministers in Luxembourg.
Meanwhile Ireland, which will take over the EU presidency from Cyprus in July and has traditionally been one of the staunchest opponents of centralizing supervision, also appears undeterred – at least, not yet.
Finalizing a Council position on MISP “will be my main focus over the coming months.” Simon HarrisIreland’s finance minister told reporters earlier this week. “If not now, when, in relation to Europe’s decision to deepen its capital markets.”
On this I think, we all can agree.
Economy news roundup
The ECB raises interest rates for the first time since 2023. Thursday’s decision, which was widely expected by investors and analysts, takes the ECB’s key rate from 2% to 2.25%. It marks the ECB’s first rate hike since September 2023. “The war in the Middle East is generating inflationary pressures and the decision to raise rates is strong in a range of scenarios that show how the shock could evolve and affect the medium-term outlook for the euro area,” ECB president Christine Lagarde told reporters. The ECB also raised its inflation outlook for this year to 3%, from 2.6% forecast in previous prediction in March; It also cut its growth forecast for this year by 0.1 percentage point, to 0.8%. Read more.
EU announces freeze on oil caps in latest sanctions on Russia. Brussels’ proposed measures – the 21st package since Moscow’s outright occupation of Ukraine – would lift the EU’s adjustable oil price cap on Russian exports until January next year. The mechanism allows EU firms to service Russian tankers provided oil is sold below the current limit of $44.10 a barrel. Diplomats, however, warn that the proposal could face obstacles similar to those that condemned Brussels’ plan for a complete ban on maritime services in the 20th package of sanctions, after some capitals insisted on the US moving in step. Read more.
