Germany is open to handing more powers to the EU market watchdog

The German government has expressed openness to handing more powers to a European financial regulator, in a major shift that would remove one of the biggest obstacles to consolidating the bloc’s capital markets.

Germany’s long-standing reluctance to transfer financial supervision from Bonn’s financial supervisory authority to the European Securities and Markets Authority, headquartered in Paris, has been a major stumbling block to progress on an EU capital markets union. This initiative is one of the priorities identified by former Italian Prime Minister Mario Draghi in his latest report on how Europe can regain its competitiveness against global competitors such as China and the United States.

German Finance Minister Lars Klingbeil recently agreed to explore areas where central oversight is warranted, as part of Franco-German preparatory work to strengthen the communications management unit, according to three people familiar with the matter.

One person said: “The (German) minister has changed.”

The discussions, aimed at forging a common Franco-German position before a meeting of EU leaders in December, cover stock trading exchanges, such as Deutsche Boerse, and the asset management industry, one of the people said.

The source said they had ruled out regulation of cryptocurrencies at Berlin’s request.

Conservative consultant Friedrich Merz, who advised US asset manager BlackRock and was a board member of Deutsche Boerse before returning to politics, supports the joint effort, according to two people familiar with the situation. Merz, who is trying to revive Europe’s largest economy, said deeper integration of capital markets could help attract foreign investment and boost growth.

The European Commission has promoted transferring oversight of selected entities such as central counterparties, central securities depositories, and trading venues, as well as cryptocurrency exchanges, to the SEC, with a proposal scheduled to be submitted later this year. Esma chair Verena Ross this week He told the Financial Times Doing so would lead to “a more integrated and globally competitive capital market in Europe.”

A senior EU official said: “If the largest member state changes its position, it will change the rules of the game.”

Talks between Klingebel and his then-French counterpart Eric Lombard intensified over the summer, two people said. One described Lombard’s visit to Genshagen Castle, near Berlin, as the moment when Klingbeil agreed to speed up work on the Communications Management Unit.

Proponents – including France – say the EU’s unified supervision of systemic financial infrastructure, such as securities markets and central counterparties, would set consistent standards across the bloc, reduce market fragmentation, and reduce compliance costs for cross-border operators.

In his report last year, Draghi cited the CMU and the establishment of a European securities regulator as one of the main levers of growth.

Paris has long called for greater centralization and strengthening of the Rescue Society. As part of a broader reset in Franco-German relations, Lombard, a former CFO from the political centre-left, sought to revive bilateral work on the issue, according to people familiar with the discussions. Two of the people said he had found a willing partner in Klingbeil, who belongs to the pro-business wing of the German Social Democrats.

A spokesman for the German Finance Minister said: “Germany aims to strengthen supervisory convergence.”

They added: “We are working with France to find concrete answers on how to improve the efficiency of supervision while avoiding creating new administrative burdens.”

Klingbeil cited the Communications Management Unit as a top priority. Speaking at the Hertie School in Berlin last month, he said: “The European capital market is still very fragmented. It is still very difficult for startups in Europe to raise money. We can no longer afford this – and I agree with my French colleague Eric Lombard on this.”

A few weeks later, he reiterated that the project “is one of the things that can contribute significantly to the success of the European idea.” Klingbeil expressed his intention to do his part, so that startups on the continent do not have to “go to the United States” to expand their business.

“It’s one thing to say it behind closed doors in Brussels,” noted Guntram Wolff, a senior fellow at the Brussels-based Bruegel think tank, but “it’s another thing to say it publicly in front of a national audience and risk paying a political price for it.”

“For many years Germany has been in favor of the idea of ​​a capital markets union, largely due to its strong bank-based intermediation model and its lack of capital markets traditions,” Wolff said. “If Berlin changes on this, it will inject momentum.”

But political turmoil in France may pose a new obstacle. Lombard was replaced last week by Roland Lescure, a member of President Emmanuel Macron’s centrist party. But French Prime Minister Sébastien Lecornu has since resigned, and Macron is expected to name a new prime minister on Friday, meaning Lescure may not remain in office.

Other countries, most notably Luxembourg and Cyprus, remain opposed to more central supervision.

“More centralization will not open the door to additional financing for the EU economy and will take time and also entail costs for companies to implement a new institutional structure,” Gilles Roth, Luxembourg’s finance minister, said on Thursday.

Berlin and Paris are striving to avoid creating more bureaucracy and will push for concrete product initiatives to channel savings into European capital markets, two of the people said.

In July, Klingbeil and Lombard commissioned Jörg Köckes, Klingbeil’s predecessor at the German Finance Ministry, and Christian Noyer, the former governor of the French Central Bank, to formulate proposals to boost financing for startups and scale them up across the European Union.

Additional reporting by Sam Fleming in London