Europe Strives for Financial Sovereignty

When the Italian bank UniCredit started building a significant stake in the German lender Commerzbank in 2024 as part of a takeover strategy, the German government strongly opposed the move, calling it “hostile,” partly due to Commerzbank’s importance to German industry.

Commerzbank rejected the offer, although officials at the European Central Bank warned that such resistance undermined the single European banking market.

The episode served as a stark reminder of a contradiction in the EU’s financial architecture: although member states support deeper integration, they are often reluctant to surrender control.

Yet further consolidation may still lie ahead, as calls for EU autonomy in finance continue to grow.

The EU single market emerged in the 1990s, and experts have argued that the EU will never become a true superpower unless its financial services sector becomes both genuinely European and globally competitive.

A recent confluence of internal and external pressures has added urgency to these demands.

Brexit marked a setback for the EU by depriving it of the City of London, its single globally significant financial centre; since then, the bloc has relied on a patchwork of hubs – including Frankfurt, Dublin, Paris, Milan and Amsterdam – none of which match the scale of New York or Hong Kong.

Then came Russia’s invasion of Ukraine, which prompted financial sanctions against Russia, including the exclusion of Russian banks from the Brussels-based SWIFT system and the freezing of Russian assets in Europe, all stressing the EU’s alignment with US financial architecture.

Even more significant was Trump’s victory in the 2024 presidential election, which reminded Europeans that nationalism is a feature rather than a bug of 21st-century America.

Since Trump returned to the presidency, US economic policy has been staunchly anti-European, with higher tariffs on EU products making the need for European sovereignty more pressing.

A speech by Vice President JD Vance in Munich last year unsettled European policymakers, as did renewed pressure on Denmark over Greenland, including suggestions the territory could come under US control.

Fears that the invisible thread holding together the transatlantic alliance has frayed are now spilling over into the financial sector.

European policymakers are openly questioning whether the Federal Reserve, under a nationalist US administration, would still fulfil its role as the global lender of last resort, as it did during the Great Recession.

A report led by former European Central Bank President Mario Draghi has injected fresh urgency into calls for European financial sovereignty, arguing that the EU risks falling behind competitors unless it accelerates financial integration.

A separate EU-commissioned report led by Enrico Letta reinforces the message from a single market perspective.

Letta argues that Europe must complete its internal market to unlock scale.

Both reports highlight structural weaknesses – fragmented capital markets, limited risk-sharing and insufficient depth in financial services – and warn that without reform Europe will struggle to fund priorities such as the green transition, digital innovation and defence.

European policymakers have taken their time to absorb the lessons.

“The Draghi report has been widely discussed by political leaders,” says Holger Schmieding, chief economist at Berenberg Bank.

At the epicentre of the debate lies the consolidation of EU capital markets, a project the bloc has been pursuing for over a decade.

One of the weaknesses in Europe’s economic model identified by the Draghi report is the underuse of the bloc’s accumulated capital.

Compared with the US, Europe has struggled to channel savings into investment for companies, particularly in the technology sector.

Approximately €14trn of retail capital in Europe is estimated to be sitting idle in deposits.

Another concern is that Europe’s investment environment is gradually being shaped by US firms.

American investment banks already play a leading role in Europe’s capital markets, accounting for roughly 40 percent of investment banking fees and an even larger share in key areas such as M&A and equity underwriting.

The European Commission has relaunched its plans for a capital markets union under the broader banner of a “Savings and Investment Union.”

Measures under consideration include tax incentives to encourage retail investment in European assets, changes in capital requirements for banks and insurers to support lending, and reforms to private pension and savings frameworks aimed at channelling household savings into capital markets.

The reforms aim to indirectly tackle a long-standing problem in the European economy: overbanking – too many banks competing for a relatively fixed pool of capital.

The large number of banks across Europe has limited economies of scale and weakened competition, while encouraging firms to rely more heavily on bank lending than on bonds or equity financing.

Sceptics warn that even if implemented, the plans do not go far in addressing structural problems.

“The proposals so far will further harmonise capital markets but not complete it,” says Carsten Brzeski, global head of macro research at ING Research.

The bloc’s largest economies have backed the Commission’s proposal to expand the supervisory role of the European Securities and Markets Authority in Paris, giving it direct oversight of major cross-border market infrastructures.

Currently supervision remains largely national, even for institutions whose activities span multiple jurisdictions, as member states resist EU-level oversight.

Reforming Europe’s financial architecture requires reviving the politically sensitive project of a fully fledged banking union.

Removing the national barriers that fragment European banking has long proved difficult.

The plan was announced with great fanfare in 2012 during the Eurozone debt crisis, but the job remains unfinished.

Eurozone banking remains a loosely connected collection of national banking markets, given that deposit and loan markets have stayed largely under national control.

The crisis triggered a retrenchment in cross-border banking activity, with EU banks’ cross-border exposures and interbank lending falling by 25 percent and 40 percent respectively.

Yet Ignazio Angeloni argues that the banking union has achieved its original goal: making banks safer and preserving financial stability.

“No significant banking crises have occurred since then, while there have been some elsewhere in the world, bank balance sheets have been cleaned and bank profitability restored,” he says.

Most analysts agree that the missing piece is a shared deposit insurance scheme that would serve as a common safety net for depositors.

The Commission hopes that reviving plans for a European Deposit Insurance Scheme could unlock deeper integration.

“In an ideal world, it is critical,” Brzeski says.

On the monetary front, the EU’s grant project is the ECB’s push for a digital euro, a central bank digital currency.

A pilot phase is expected to be rolled out next year, with full issuance before the end of the decade.

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While still subject to political approval, the project has become a pillar of Europe’s ambition to reduce external dependencies, particularly from an increasingly hostile US and its dollar.

“The aggressive stance adopted by the US over the past year toward the EU has certainly contributed to unblocking the legislative process related to the digital euro,” says Matteo Bursi, a researcher at the Italian think tank Istituto Affari Internazionali.

At its core, the digital euro would offer European citizens and businesses a state-backed electronic means of payment, complementing cash.

For policymakers, it addresses a strategic concern: Europe’s heavy reliance on foreign payment providers, including US card networks and fast-growing private platforms.

With a digital currency, Europeans will have access to a secure public payment option in an era where private stablecoins and big tech payment systems expand.

Such a development would also preserve the role of central bank money in the digital age, says Rebecca Christie, an expert on capital markets at the Brussels-based think tank Bruegel.

It is tempting to view these initiatives as a coherent master plan, but the reality is messier.

Each project – capital markets union, banking union, digital euro, common debt – moves at its own pace, tugged by national interests that have historically stalled deeper integration.

The gap between political declarations and concrete action remains wide, and the window of opportunity may close if external pressures ease or if internal disagreements harden.

Whether Brussels can translate crisis-driven momentum into lasting structural change depends less on the elegance of its proposals than on the willingness of member states to give up pieces of their financial sovereignty.

Calls for a deeper, more liquid EU-issued bond market are gaining traction in Brussels.

Advocates argue that a larger pool of jointly issued debt as a European safe asset could attract long-term global capital and lower borrowing costs across the bloc.

Compared with the vast US Treasury market, Europe’s sovereign debt setting remains fragmented.

National bond markets dominate, limiting scale and reducing the euro’s appeal as a global reserve currency.

Momentum has been building since the pandemic-era launch of joint borrowing through a recovery fund, which demonstrated both investor appetite and the bloc’s capacity to issue large volumes of common debt.

Political resistance, however, has long been a barrier.

Frugal northern countries have been wary of mutualised debt, concerned it could amount to subsidising more indebted member states.

“Jointly issued debt would enhance the international role of the euro and strengthen the financial sovereignty of the EU,” says Schmieding.

“But in the multi-national EU, joint bonds must be subject to strict conditions.”

Europe’s ambition for financial sovereignty runs up against a critical vulnerability: much of the backbone of its financial system relies on non-European providers.

European banks depend on US cloud companies such as Amazon Web Services, Microsoft Azure and Google Cloud to store data and run critical operations, a solution that creates concentration risk.

Europe’s fintech sector has also struggled to match the dynamism of its US counterparts.

Investment levels remain comparatively lower and the market is fragmented along national lines.

Many flee to the US in search of deeper investor pockets; Revolut, Europe’s biggest fintech, has indicated that it is likely to choose the US as its listing destination.

Payments are another key front.

Much of Europe’s card-based payments system is routed through US giants such as Visa and Mastercard, while Chinese players like Alipay and WeChat Pay are also making forays into the European market.

“The digital euro, if designed appropriately, would lead to the creation of a payment system that is independent from those currently in use, primarily US-based, and could therefore help reduce Europe’s reliance on foreign providers,” Bursi says.

Yet without a stronger domestic fintech ecosystem, Europe risks remaining dependent on foreign technology.

“The likelihood that the US could exploit Europe’s dependence on payment systems has remained limited, yet with Donald Trump’s return to the White House, those risks have increased,” warns Bursi.

Optimists in Brussels hope that, although disparate in scope, these projects will reinforce one another, creating a virtuous cycle.

A stronger banking union would support the savings and investments union by creating more stable cross-border banks able to channel savings into capital markets.

In turn, robust capital markets would reduce overbanking and indirectly support banking consolidation.

Eurobonds would provide the common safe asset needed to deepen those markets, while the digital euro would reinforce European payment infrastructure and reduce dependence on foreign providers.

“The banking union is a project of rationalising European banking into a single system instead of 27 national ones,” says Nicolas Véron, a senior fellow at the Peterson Institute for International Economics.

“Conversely, if you make capital markets more attractive and trustworthy, you could have rebalancing from banking intermediation to capital markets activity, which is needed to enhance the European economy’s growth potential.”

Yet, for all the momentum behind deeper integration, Europe’s path to financial sovereignty remains obstructed by a familiar set of barriers.

Chief among them is the enduring power of national interests, expressed through lobbying by regulators, governments and banks that fear losing influence in a more centralised system.

Control of finance can be a sensitive issue, given the role financial institutions play in funding domestic industries.

Even if the Commission’s plans are up to the challenge, the question remains whether they will be diluted during implementation or delayed to the point of becoming untimely and ineffective, Angeloni warns.

“This will largely depend on political cohesion among the member states.

Lack of cohesion has repeatedly hampered EU reform in the past.”

Crises have historically been the catalyst for European integration, from the eurozone debt turmoil to the pandemic.

External pressures, including geopolitical competition and the need to finance large-scale investments, may again push member states toward compromise.

Ultimately, says Brzeski, integration is a means to an end: closing the gap with US markets – though it will require difficult compromises.

“If Europe really wants to become fully European, national preferences and partly national sovereignty would always have to take a step back.”