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Majority of EU states object to capital markets reform push

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More than a dozen smaller EU states fought back against efforts to unify Europe’s fragmented capital markets, highlighting the torturous politics around the decade-long financial reform effort.

France recently led a push — backed by Italy, Spain, the Netherlands and Poland, some of the EU’s biggest economies — to revive reforms to deepen market integration and centralise supervision.

Paris argues the overhaul of financial markets would help tap private capital for Europe’s huge investment needs in defence and the green transition, which run to hundreds of billions of euros a year.

But at a summit on Thursday, the steps were staunchly opposed by a majority of the EU’s 27 member states, which are wary of ceding national control and handing more oversight and regulatory powers to Brussels.

“We as a small country, we don’t have many competitive advantages, but having a very competitive tax system is what we have, so please don’t take it away from us,” Estonian Prime Minister Kaja Kallas said on Thursday.

After several hours of heated discussions talks, EU leaders agreed on a compromise, delaying a decision on whether to centralise supervision until the European Commission reports back on whether such a step was warranted. This fell short of France’s demand to give more powers to the Paris-based EU financial regulator, Esma.

German Chancellor Olaf Scholz backed Paris’ calls, a position that put him at odds with his own finance minister.

Although Berlin has traditionally opposed further centralisation of supervision, it recently supported a revival of the so-called Capital Markets Union (CMU) project, suggesting at least some part of Germany’s ruling coalition is in favour.

German finance minister Christian Lindner, a liberal, remains opposed to giving Brussels oversight powers on the grounds that it would create additional costs for its financial industry.

But Scholz, a social democrat, has warmed to the idea that integrating capital markets should be a top priority to try to reverse Europe’s capital outflow to the US, according to two people briefed on leaders’ talks.

Leaders on Thursday also called for “harmonising relevant aspects of national corporate insolvency frameworks”, but watered down references to aligning their corporate tax legislations after Ireland and others pushed back against it.

Such measures were part of the original CMU outlined almost a decade ago and remain highly contentious.

“We’ve had a very long debate, because we start from different positions, but it’s also an essential battle if we want to succeed in the next stages,” said French President Emmanuel Macron following the summit.

The backlash became evident ahead of the summit, when ambassadors from a group of smaller nations led by Luxembourg raised objections to the plan, according to five people familiar with the discussion.

Austria, Bulgaria, Cyprus, the Czech Republic, Ireland, Croatia, the Baltic countries, Malta, Romania and Slovenia also joined the rebellion and argued that central supervision would create additional cost for their national financial industry, giving larger markets a competitive advantage.

Luc Frieden, Luxembourg’s premier, said on Wednesday the EU capital market reforms needed to avoid overregulation and over-centralisation. “We want a pragmatic approach,” he added.

Centralising supervision is “not in the best interests of all member states and certainly not in the best interests of smaller member states”, Irish Prime Minister Simon Harris said on Thursday.

Additional reporting by Laura Dubois

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