Savings and investment union risks further stifling European growth
A policy-maker's cautionary tale, 'The path to hell is paved with good intentions', rings true as European Union institutions prepare to address a long-standing gap in Europe's single market: financial services.
Recent regulatory discussions on cryptoasset service providers (CASPs) have sparked Europe's renewed efforts to create a unified financial market. The savings and investment union initiative, a step towards a capital markets union, aims to mobilize the €800 billion annually deemed absent in the EU's capital investment, as highlighted by former ECB President Mario Draghi.
Initial reports suggest the focus is on centralizing the supervision of crypto firms, central securities depositories, and market infrastructure.
Drawing parallels to the supervision of major banks under the European Central Bank and European Banking Authority, the proposed package advocates for the European Securities and Markets Authority (ESMA) to handle authorization and supervision of CASPs, while delegating tasks to national competent authorities (NCAs) and cooperating under the Markets in Crypto-Assets Regulation.
However, this centralized approach has faced criticism. Informed commentators warn that ESMA's expansion would cost tens of millions of euros, potentially hindering innovation in the industry. Key officials argue that such a move will stifle innovation rather than strengthen Europe.
The CASP sector is still in its infancy, and national regulators question the effectiveness of centralized supervision. They suggest that a 'modular, agile' approach might be more suitable, allowing for faster and more informed responses to market developments.
The debate over stablecoins exemplifies the tension between stability and flexibility. While some advocate for regulatory caution and 'payment multilateralism', others view it as a false dichotomy. The discussion mirrors the prudential tension seen in other EU financial architectures, such as Basel III and MiCA's reserve rules.
Critics argue that mandatory deposits concentrate risk in domestic balance sheets, reducing the flexibility that a reserve structure should provide. This cycle of regulatory conservatism aims for stability but may lock stablecoin issuers into banking exposures, an overlooked risk.
A potential solution lies in the wider availability of euro-denominated 'safe assets' issued by the EU, as seen in the Next Generation EU program. However, Germany's resistance to extending this initiative poses a challenge.
Another approach is closer alignment with the US framework under the Genius Act, which the European financial sector already mirrors due to the 2008 crisis and banking union failure. However, a 'multi-issuance' capacity for stablecoins faced fierce resistance.
Effective regulation depends on proximity and principle. NCAs' day-to-day engagement with firms allows faster responses, while ESMA's role in ensuring convergence remains crucial. A balanced approach between local insight and EU-wide coherence is essential.
The Digital Operational Resilience Act introduces complications, as ESMA's supervision of s-CASPs may create gaps in operational resilience. A Maltese regulator suggests a middle path, with ESMA at the center of knowledge-sharing while maintaining subsidiarity for supervision.
The centralization push has sparked concerns about the displacement of fiscal and political problems. Europe's regulatory and industrial center faces economic strain, with the Franco-German core facing stagnation and the periphery becoming the growth engine. This shift challenges assumptions about rule-making and taking.
The paradox of integration emerges: centralizing supervision in nascent areas while leaving unresolved issues like fiscal union and deposit insurance. The periphery's rise and the center's overreach signal a rebalancing of Europe's political economy.
To maintain credibility, the Union must foster innovation and decentralized initiative, avoiding a bureaucratic pull towards Paris or Frankfurt. Otherwise, the SIU risks becoming a symbol of Europe's wrong kind of centralization.
A pragmatic path may lie in cultivating the strengths of the supervisory mosaic, rather than further centralization.
