The 28th regime offers a potential overhaul of Europe’s capital markets with the potential to enhance market integration, reduce fragmentation, and foster cross-border investment – however, it also poses risks, writes Apostolos Thomadakis, research fellow at the European Capital Markets Institute (ECMI).
The 28th regime offers a potential overhaul of Europe’s capital markets, aimed at addressing key challenges such as financing the green and digital transitions and unlocking private capital. By establishing a streamlined supervisory framework under ESMA, the regime could enhance market integration, reduce fragmentation, and foster cross-border investment. However, it also poses risks, including the possibility of deepening market disparities and hindering the broader goals of the Capital Markets Union. For the regime to succeed, it must balance national interests with the need for a cohesive and competitive European financial market, positioning Europe as a global leader in sustainable finance.
Europe’s capital markets constrained by fragmentation and regulation
Europe’s capital markets are at a critical juncture. The twin challenges of financing the green and digital transitions – requiring an estimated EUR 700–800 billion annually over the next decade – are far beyond the capacity of public budgets and traditional bank lending. Unlocking private capital is no longer optional; it is imperative. However, Europe’s financial landscape remains constrained by structural and regulatory inefficiencies that hinder the development of deep, integrated, and efficient capital markets capable of addressing these challenges.
One of the key issues is the limited scope for retail investors to participate in capital markets. European savers are often confined to low-yield financial products due to consumer protection rules that, while well-intentioned, restrict access to higher-return investment opportunities. This dynamic discourages capital flows into innovative and growth-oriented sectors, stifling the potential for wealth creation and broader economic growth. Revamping savings products and enabling more direct engagement with capital markets could be transformational in mobilising private investment.
The near-elimination of the securitisation market is another glaring bottleneck. In contrast to countries like the US, Canada and Australia, Europe has yet to harness the full potential of securitisation as a tool to recycle capital and fund businesses. Reviving this market could unlock EUR 300–400 billion annually, but doing so requires a coordinated effort to ensure that securitisation products are both attractive to investors and aligned with robust regulatory standards.
Fragmentation of Europe’s capital markets further exacerbates these issues. National supervisory frameworks create inefficiencies, as firms operating across borders must navigate a patchwork of regulations, duplicating efforts and increasing costs. This lack of harmonisation stymies the development of pan-European financial products, which are essential for creating a truly integrated capital market. The current structure inhibits the free flow of capital and restricts market participants from reaping the benefits of scale and competition.
Towards a 28th regime: A new framework for capital markets integration
To address these challenges, a more systematic approach to determining the most efficient supervisory structure is needed. For instance, a “supervisory efficiency test” could be implemented when reviewing legislation such as MiFID or UCITS, evaluating whether supervision should remain national, adopt mutual recognition, or shift to a supranational level based on the complexity and integration of the market. Balancing the “right to move” with the “right to stay” could also help preserve market presence and influence for smaller or less-integrated regions.
Taxation, governance and shareholder rights present additional complexities. These areas are deeply embedded in national legal frameworks and any attempt at harmonisation must tread carefully to avoid disrupting established practices. A gradual approach to transferring responsibilities, informed by the experiences of the banking union, could help mitigate resistance and build trust among stakeholders.
Beyond structural reform, there is a need for a cultural shift in how Europe approaches capital markets. Policymakers must balance the drive for harmonisation with the need to foster innovation and growth. This includes rethinking the role of regulation to ensure it supports, rather than stifles, market development. For example, simplifying processes for asset managers to operate across borders and aligning rules to reduce compliance costs could enhance competitiveness without compromising investor protection.
Harmonisation efforts should focus on eliminating unnecessary national variations, particularly in areas like prospectus standards, to reduce duplication and complexity. Using KPIs to track market integration, leveraging AI and digital tools to overcome language barriers, and enhancing trust among retail investors are practical steps to increase efficiency. Mechanisms such as EU-wide arbitration for dispute resolution could simplify redress for retail investors, building confidence in cross-border products.
One proposed solution to overcome these barriers is the establishment of a ‘28th regime’ for Europe’s capital markets. This concept envisions an optional framework under the European Securities and Markets Authority (ESMA) that would allow firms to opt into centralised supervision while maintaining collaboration with national authorities. Such a regime could streamline oversight for cross-border activities, reduce administrative burdens and foster the creation of pan-European products. By offering a single set of rules and a single supervisor for certain aspects of the market, the 28th regime could significantly enhance market efficiency and attractiveness.
Potential risks and challenges of the 28th regime
The 28th regime, while offering the potential to streamline Europe’s capital markets, poses several risks that could undermine its intended benefits. One of the main concerns is the possibility of increasing fragmentation within Europe’s financial markets. If some countries opt into the regime while others remain outside, it could create two-speed markets, with the more developed markets benefiting from integration while smaller, less-developed regions fall further behind. This division could worsen existing disparities, making it harder to achieve a truly unified capital market.
Another challenge is the potential for divergent speeds in market development. Countries with more advanced financial markets might implement the regime quickly, while those with less sophisticated markets could struggle, leading to uneven progress across the EU. This imbalance could discourage investment in slower-moving markets and delay the realization of a fully integrated European capital market.
The 28th regime also risks complicating the broader goal of the Capital Markets Union (CMU). Instead of fostering a single, seamless financial market, it could result in the emergence of smaller, regional unions with differing regulatory frameworks. This fragmentation could hinder the free flow of capital across the EU, making it difficult for Europe to compete globally as a unified economic entity. National authorities might also resist the shift toward centralised supervision, fearing a loss of sovereignty and control over domestic markets.
Finally, the 28th regime must strike a delicate balance between national diversity and integration. Europe’s financial markets are deeply rooted in national traditions, and any attempt to harmonize regulations too aggressively could generate significant political resistance. Success will depend on the regime’s ability to incorporate national perspectives while promoting a cohesive, integrated capital market that can compete on the global stage.
Striking the right balance
A well-designed 28th regime could be a game-changer for Europe’s capital markets, fostering greater integration and dynamism. By offering a streamlined framework for cross-border supervision, it holds the potential to position Europe as a global leader in sustainable finance. This regime could channel much-needed private capital into the green and digital transitions, aligning with Europe’s environmental and economic objectives. However, time is of the essence: delays in reforming Europe’s capital markets will result in missed opportunities and underutilized private capital, further delaying the continent’s growth prospects.
Despite the benefits, the 28th regime carries risks that must be carefully managed. Fragmentation remains a major concern. If some countries opt in while others stay out, it could create a two-tiered market, exacerbating disparities between more and less developed markets. This could hinder the smooth flow of capital and undermine efforts to create a truly unified capital market. Additionally, uneven speeds of implementation across the EU could create imbalances, potentially discouraging investment in slower-moving markets and delaying Europe’s capital market ambitions.
The 28th regime also risks complicating the broader Capital Markets Union (CMU) project. Rather than fostering a single, integrated European market, it might inadvertently lead to smaller, regionally divided unions. This could create obstacles to pan-European financial products and undermine the goal of a competitive, unified market. Furthermore, national resistance to centralised supervision could delay or derail progress, making it essential for the regime to balance national sovereignty with the need for a more integrated market.
In conclusion, the 28th regime represents a bold step toward the integration of Europe’s capital markets, but these risks must be addressed for it to succeed. A careful, collaborative approach that balances ambition with pragmatism will be essential for transforming Europe’s capital markets into a globally competitive and sustainable financial hub. Only through a cohesive, pan-European framework can Europe achieve its financial and sustainability goals.