‘If we have 27 markets, we will be a colony of Wall Street’

Good morning. Donald Trump is reportedly considering naming a shadow chair of the Federal Reserve, in a bid to undermine Jay Powell and push him and the Fed to cut interest rates. That would be a dumb thing to do. Let’s hope cooler heads prevail. Email us: [email protected].

Friday Interview: Enrico Letta

Enrico Letta is the dean of IE School of Politics and president of the Jacques Delors Institute. He served as prime minister of Italy in 2013-14 and led the Italian Democratic party from 2021 to 2023. He is also the author of “Much More than a Market”, a report on EU market integration commissioned by the European Council and the European Comission. He spoke to Unhedged by phone last week, covering topics ranging from the costs of regulatory fragmentation to the creation of a virtual 28th European regime.

Unhedged: Why wasn’t financial integration a priority when the European single market was created?

Enrico Letta: Three reasons. First, the creation of the euro absorbed so much energy that the leaders decided to let the integration of financial markets wait. Second, we had the financial crisis, which was terrible for financial integration, because it was the way for European leaders to say, for years and years, “I don’t want to put my face in finance.” And the third killer of capital markets union was Brexit, because that happened immediately after the European Commission launched the integration of financial markets project in 2014. The idea was to have London as the financial capital. And then Brexit happened in 2016, and that killed the project, because the countries fought each other to see which capital could substitute for London as [the] financial capital. That brought disaster, because there is no other London.

Those are the three reasons that in 2023 the European Commission and the council asked me to write a report on how to finally integrate the financial markets. And I proposed we change the name first. So we moved from “capital markets union” to “savings and investments union”. 

Unhedged: Why does the name matter?

Letta: Because the name is a way to completely change the story. In the new name, you have the link with investment — the bridge between finance and the real economy. It is a way to say, “We’re doing this because Europe needs investment.”

Unhedged: What are the steps on the road to a truly European banking system — a system in which there are European champion banks, rather than just national champions? 

Letta: First of all, this is bigger than just banking. This is something that touches the entire financial system. The banking system needs a specific agreement among governments about how to organise the system of deposit guarantees and its common backstop. So I hope the fact that today the entire process is moving will convince the member states to find an agreement on this point.

On financial services, the first step is to build a European savings system with better returns and with an incentive to create European pension funds. The second step, as laid out in commissioner [Maria Luís] Albuquerque’s plan, is how to link savings to investments, to incentivise the use of savers’ money to fund investments that are necessary at the European level. To label these investments, they are digital transition, green transition and security.

To these points, you have to add the problem of supervisory authority, because today you have the 27 supervisory authorities in the financial markets. So we need to organise an integrated system where the 27 are working under the leadership of European supervisory authority, similar to what is happening with the ECB, where the national central bank works with power on the ground, but as a subsidiary of the ECB.

There are many other important topics, for instance the creation of a single point of entry to Europe for financial products. Today we have 27 points of entry. When a fund starts in a country which is considered a non-accountable country, a small country, for example one with a tradition of links with Russian money or something similar. It is clear that today that there are walls that are created at the European level to avoid operations from these countries extending to the entire European market. At the end of the day, it is a sort of discrimination and it is a way not to have a level playing field. So we need to have a single point of entry with a common and effective compliance process.

Unhedged: What do you say to the sceptics who argue that the national authorities in the financial markets will never give up power to the European authorities?

Letta: My answer is very easy. We have to find a good compromise between the two. The national authority on the ground can be more effective, but at the same time, if we have 27 markets — and this is the core of the entire process — we will be a colony of Wall Street and the US market. If we continue like this, we are a colony. My proposal and the entire project of the Savings and Investments Union is to be stronger, more independent, more integrated — and more attractive to capital coming from the US.

I’ll add one more point: there is also a problem of the integration of the legal systems — 27 corporate laws, 27 solvency laws, and of course if we create a single financial market we need legal integration. How to do so without opening the Pandora’s box of the fight between national level and European level? These laws have been there for centuries. So the proposal in the report is for a so-called 28th regime. We can use the comparison with Delaware. It is a virtual state, not a physical state like Delaware, but the idea is to give it its own legal framework which is valid everywhere in Europe. So that can be a sort of passport. Of course, Delaware is not a perfectly correct comparison, because Delaware is also a fiscal haven. In this case, it’s all for rules.

When I am presenting the report everywhere in the capitals of Europe, the 28th regime proposal is the most popular. People are seeing that maybe finally there is a simplification path. Because the over-regulation and over-complication we have in Europe is stopping people from investing. But the cornerstone is to apply to the single financial market the method that won with the euro. That means setting a binding deadline, for example 1 July 2027, as the starting moment of the new Savings and Investments Union.

Unhedged: What is the path to a true European safe asset and how long will it take?

Letta: I put this in the same basket as this entire process — financial services, banking union, the safe asset. These are the three structures. The safe asset, I think, is no longer a chimera, something impossible to reach. I say that because I saw in Germany a more open approach to it, from both the Bundesbank and the German government. Because it is clear that the safe asset means partially replacing the Deutsche Bund, which is something similar to the safe asset today, and creating a safe asset using all the tools the European Union has. I’m not saying it’s easy; I’m saying that today it is not impossible. Five, 10, 15 years ago it was impossible.

Unhedged: How does the talk about de-dollarisation or America losing some of its safe haven status change how this whole project looks?

Letta: That’s the other part of the project. What [ECB president Christine] Lagarde said in your newspaper the other day is a demonstration that there is room today to say something that was unthinkable even two years ago. The “global euro” is possible because of the stepping back of the US. It is part of the Trump approach to say, “we’re stepping back from our responsibilities as global rule-setter and policeman”. And the first implication is the role of the dollar, of course. And that means the euro has room to do something more, and it is part of the same discourse of Europe gaining autonomy and independence. On this topic, the digital euro is also a chapter of the story. 

Of course, in all these discussions, we have concrete examples of the opposite. For instance, Commerzbank and UniCredit discussing [a merger] without any possibility of an agreement, only because one is German [and] the other one is Italian, not because of our other technical or market problems. 

Unhedged: So we have to have cultural evolution along with institutional evolution?

Letta: Yes. I’ll make the key point simple. In the US, you launch a brand in financial services, Armstrong and Partners. And your brand is American and has immediate access to all of America. I launch a brand in Europe, Letta and Partners. It will start, not as European, but as Italian. It will have an Italian passport, but I will try to bring it to Paris or Madrid. And probably the neighbouring countries will be the first obstacles to my expansion, because they will see competition. My problem won’t arrive from the Chinese or the UK or the US. It will be from Germany, France, or Spain, or the Dutch, or Irish. And at the end of the day, that is the big difference. And culturally, we have to give European passports, and we have to consider that a European product is a European product, not an Italian, or a Belgian, or a Slovenian product.

One good read

Isolationism lite.