POLICY DOSSIER

Spring 2008

by Manfred Weber

The mosaic of a Single EU financial market is visible but unfinished, reports Manfred Weber, Chief Executive of the Association of German Banks

Konrad Adenauer, Germany’s first post-war leader once said: “European unity was a dream of a few people; it became a hope for many. Today, it is a necessity for us all.” He could easily have been speaking about the current efforts to turn European financial services into a genuine single market. Despite great progress integrating EU financial markets, barriers still remain in some key areas like retail services, bank takeovers and mergers and tax harmonisation, to name but a few. Creating a single financial market would help to boost economic growth and prosperity in every member state. It would also increase consumer choice, open a host of new investment opportunities, strengthen the EU banking sector and make Europe a centre for financial innovation.

So what will the single European financial market of the future look like? Three features will be essential. First and most important, there must be a level playing field within the European Union. Second, consolidation of the European banking sector needs to be extended, with all protectionist barriers or other obstacles to mergers and acquisitions eliminated. And third, the European market place should be fully integrated into the global network of financial centres, particularly those in the United States and Asia. If you imagine the single European financial market as a large mosaic, it would still look incomplete today. Some important pieces are already in position; and an overall pattern is visible. But certain vital parts are still missing, and it is these pieces that European politicians now need to start putting in place.

The Financial Services Action Plan, which was launched in 1999 and implemented in stages, focused mainly on the securities markets. It boosted competition and innovation for professional traders and encouraged institutional market players, in particular, to trade across EU borders. As a result, considerable progress has been made in the “wholesale” securities sector. Retail customers, however, were largely ignored. But the aim of creating a “European home market” should by no means be reserved solely for wholesale market players. Not only do retail customers deserve the chance to buy products and services from all member countries, it would also be very much in the banks’ own interest, since retail banking in the EU offers enormous potential. According to surveys by the European Commission, more than 10% of European banking and insurance customers would like to use foreign products and services, but only 5% of these customers currently have an account with a foreign bank. The figures for credit cards are even lower – only around 3% of Europeans have a card from a non-domestic provider. About the same number make private provisions for their retirement with a foreign bank, and only 1% of retail customers takes out a mortgage in another EU country.

The reasons for this reluctance to buy foreign financial services are clear. Of course there are “natural” barriers, like different languages and national mentalities, and these obstacles cannot be overcome swiftly. Doing so will be a gradual cultural and social process. But there are also far more significant “man-made” barriers, particularly those created by different national legislation in the fields of investor and consumer protection. These regulations can differ widely from country to country. What information requirements do banks have to comply with? What formalities do customers have to complete if they want to open an account in another EU country? Additionally, consumers will not find any uniform standards over loans or other financial guarantee agreements in the EU. The result is obvious; a lack of uniformity is preventing both banks and consumers from doing more cross-border business. This is where policymakers must act; only harmonised rules and EU-wide standards will eliminate costly and time-consuming compliance with different national regimes.

Another missing piece in the EU’s financial market mosaic is the harmonisation of tax laws. It is not a question of aligning tax rates as, on the contrary, these can and should be determined by competition. The aim of harmonisation is to make cross-border trade easier for business. For example, if there is no standard way to determine taxable income, or off-set losses, it is hard for firms – including banks − to sell their products in other member states or to optimise their cross-border corporate structures.

Despite such headaches, significant progress towards a single financial market is being made in some areas. The technical conditions required for the Single Euro Payments Area (SEPA) have been put in place by banks working together in the European Payments Council. Customers can for the first time make all their euro payments as safely, efficiently and conveniently as they do at home. The payment products they use are based on uniform pan-European procedures. The SEPA is just one of several measures designed to support the growing mobility of European consumers. The banks’ corporate customers also benefit because all SEPA payments are streamlined.

An efficient and strong harmonised European financial market also needs the centralisation of supervisory competences, embedded in a system of European supervisors. An EU-level supervisor cannot of course be created overnight, but convergence of national regulations should be driven forward and closer cooperation between national authorities should become a priority. Otherwise, national authorities cannot respond properly to cross-border developments. One major step toward an EU-wide system of national financial supervisors would be the creation of a “European supervisory culture” as the Commission has suggested. Ultimately, the aim should be to create a single institution responsible for supervising large banks that operate across the EU, with national regulators responsible only for domestic banks. The European System of Central Banks could serve as a model.

Centralised financial supervision in Europe would offer a number of advantages: it would avoid the need for banks to duplicate reports to different authorities, and would allow financial rules and supervisory practices to be harmonised while also eliminating distortions to competition. The resulting synergies would help to cut the cost of regulation. European finance ministers are due to discuss this issue at their ECOFIN Council meeting in April.

ECOFIN also needs to look at ways to remove the remaining barriers to cross-border mergers and acquisitions, so that through consolidation EU banks can grow big enough to compete more effectively in the global markets. Although direct legal obstacles have been eliminated in Europe, such indirect obstacles as taxation − which can make a merger unprofitable − persist. Some national governments have a part to play, too. Germany, for instance, offers a notable example of the problems created when a country is largely by-passed by the global banking trend towards consolidation. When measured against the size of our national economy, most German banks are still too small; they trail their international rivals both in terms of market capitalisation and total assets. Germany needs three or four big banks to take their place among the market leaders in Europe and to be at the forefront of the consolidation process. In other countries, policymakers set course for modernisation of the banking sector years ago and have since reinforced their financial institutions’ competitiveness to the benefit of customers and banks alike. But the “three pillar” structure of the German banking system is a drag on growth. While public banks can – and do – buy private banks, the reverse is blocked by law. It is a political fact of life that clearly distorts competition.

While there is much for the EU – and Germany – still to do, it would be wrong to focus solely on Europe. The financial industry has operated globally for many years, and the activities of European companies and banks are not confined to the EU. That is why EU financial policymakers need to make sure the Union has a strong and, above all, united voice on international bodies. The EU should not have to adapt to rules that have already been negotiated at the international level; we ourselves must be active in setting the rules in the first place. In bilateral talks about regulating financial markets, the EU should also strengthen its negotiating stance. In this context, efforts to promote transatlantic economic integration are particularly welcome; mutual recognition of financial market standards in the EU and the US would certainly improve efficiency and increase growth.

An integrated single market in financial services has a host of opportunities to offer Europe’s consumers and businesses. It would serve as a platform for innovation and increased competitiveness, and would boost Europe’s global role by enabling our banks to compete harder on the worldwide market place. Many pieces of the puzzle are already in place, so our cry should be “come on, Europe, let’s finish what we’ve started.”