A competitive European economy will only come through political courage and by overcoming nationalist reflexes

By Stefano Mallia, President of the Employers’ Group of the European Economic and Social Committee

The EU’s economic power in the world has declined and its strategic position has been seriously weakened as geopolitical tensions have intensified. Against this backdrop, two pivotal reports were commissioned to assess the EU’s competitiveness and its single market. The results, in the form of reports by former Italian prime ministers Enrico Letta and Mario Draghi, voice strong support for banking consolidation.

The fragmentation of Europe’s banking sector contributes to its weak competitive position. Larger, more efficient banks, to be formed through cross-country mergers, could significantly strengthen the industry’s ability to compete globally. And yet, this week the German government opposed Italian bank UniCredit’s attempt to acquire Germany’s Commerzbank.

This is not just a one-off but a worrying reflex by national governments that we have seen time and again. The EON/Endesa takeover in 2008 comes to mind, when the Spanish government got involved to block the German company’s bid. The same happened when the French president, Nicolas Sarkozy, initiated moves to protect crisis-ridden Société Générale from a foreign takeover, and when the Portuguese leadership tried to block the Spanish Santander group from buying Banco Totta & Açores, S.A. And there are further examples in other Member States. 

The EU needs some very large banks with global reach, not because there are no high-quality operators at national level, but because, as it stands, they are simply dwarfed by American and Chinese ones and, if we want to compete globally as Europe, we must have operators capable of competing with the USA and China. Just for comparison, JPMorgan Chase’s market value is roughly equivalent to that of the ten most valuable banks in Europe.

Talking about ‘cross-border’ within the EU is a fallacy given that the fundamental raison d'être of the EU is based on the removal of borders. An Italian bank looking to buy a bigger share of a German bank is exactly what EU companies and leaders have spent years crying out for, so that we can pave the way for corporate champions to compete.

We need deeper EU integration. We need a banking union and we need a capital markets union; we recently heard Enrico Letta calling for a savings and investment union. The word ‘union’ is omnipresent.

The German position on the proposed UniCredit/Commerzbank merger raises concerns as it undermines the very principles of the EU’s single market. We all need to understand that the geopolitical dynamics have changed and that such a change also requires a change of mindset in terms of how we see and evaluate such mergers and acquisitions. Either we adapt to this dynamic or we will cease to exist.

By opposing moves like UniCredit’s, governments are jeopardising the EU’s efforts to strengthen its banking sector, especially in an increasingly globalised economy where scale and international reach are crucial.

This could hinder European competitiveness, as banks from other regions – such as the US and China – benefit from fewer restrictions and greater consolidation opportunities. Ultimately, such opposition could weaken Europe’s ability to compete globally, reducing the overall effectiveness of the single market as a tool for economic growth and integration in a continent that depends on banking finance for 75% of its funding needs.

The single market is designed to ensure that businesses can operate freely across EU borders, promoting competitiveness and allowing companies to expand and grow within a larger European framework. We cannot afford protectionism: favouring national interests over the broader goals of the EU is just a plain mistake.

Indeed, such actions create damaging legal uncertainty, and thus deter foreign investment, encourage the flight of European capital to other shores and discourage cross-country mergers, which are essential for creating larger, more competitive European firms capable of competing on the global stage.

Mario Draghi quantifies the additional annual investment needed at over €800 billion, or about 5% of EU GDP. Financing this investment will require more private resources, which will necessitate developing European capital markets and completing the banking union, along with greater public resources for joint projects funded by joint European debt to finance innovative start-ups, preventing them from moving to the USA.

This makes the efficient functioning and consolidation of European banks crucial to the region’s financial health and competitiveness – and a matter that should be left to companies and not to governments.

We are entering a new dynamic of uncertainty as the geopolitical certainties of the past are no longer fixed. Such uncertainty brings with it tremendous challenges; and indeed, one such challenge is the question of how we can make Europe a competitive economic powerhouse once again.

In their reports, Draghi and Letta have spelt out in no uncertain terms what is needed. On top of what they have proposed, we need to add political courage, because it is only with this vital ingredient that we will ultimately be successful.