Progress towards a European financial architecture has brought tangible benefits for European firms and consumers. Important pieces, however, such as a single insolvency logic, deep pools of capital, a common safe asset, a unified post-trade layer, and a common deposit guarantee have been left out.
Filling these missing pieces requires the transfer of a risk, a supervisory competence, a tax base, or a national champion across a border. Not all member states are willing to do this. As a result, the capital markets union and the banking union risk remaining stuck in a politically stable state of “mediocrity” that is ill-equipped to meet economic challenges.
A stable state without obligations
In a contribution to CEPR's Europe 2050 series, we argue that the most likely outcome for Europe in 2050 is an equilibrium, which we call mediocrity. A financial architecture in which every European supervisory and regulatory institution formally exists, every directive has been transposed, every strategy has been published, and none of it is binding. This mediocrity is not a transitional state, but rather a stable, self-reinforcing, and politically convenient equilibrium with its own interest groups and its own logic of reproduction.
The EU has no fiscal capacity left; government deficits are persistent and central banks’ balance sheets remain large. Standing still means to be shaped by decisions taken elsewhere, for example with regards to tokenized market infrastructure, stablecoins, artificial intelligence in intermediation and supervision.
To ensure Europe’s financial system behaves as a union rather than as a coordinated collection of national systems it will need to complete the banking and capital markets union. This includes a single set of post-trade plumbing and a single asset that can serve as a reference for financial transactions across the euro area. Moreover, new standards for digital payments, tokenization, and AI must be established at the European level to ensure relevance. In addition, supervisory practices must adapt more closely to a market-based financial system.
Three Europe’s in 2050
Three scenarios for Europe are conceivable in 2050, depending on decisions taken, deferred, or overtaken in the next ten years.
Convergence. In the first scenario, a permanent EU safe asset exists, alongside a reinsurance-based deposit insurance structured, and an optional "28th regime" for company, securities and insolvency law. None of this needs a new treaty or a fiscal union. The obstacles are entirely political.
Fragmentation. In this scenario, a shock arrives while the reforms are still pending. National authorities ring-fence their markets. As a result, Europe does not revert to purely national markets. Instead, savers are pushed towards American capital markets and dollar-denominated digital money. Fragmentation swaps pooled European sovereignty for no sovereignty at all.
Mediocrity. The Commission publishes the eighth edition of the Savings and Investments Union Action Plan: 41 actions, 33 of them recommendations. A consolidated tape exists that almost nobody uses. A European Deposit Insurance Scheme (EDIS) exists but consists only of separate liquidity backstops for each member state and has never been called upon. No crisis materializes, yet savings continue to flow abroad.
Why mediocrity is the default
Four mechanisms keep Europe in this state:
- The costs of completion fall on organized incumbents today, while the benefits go to future firms and savers who do not lobby.
- The principle of unanimity, and the habit of seeking consensus even where it is not required, lets determined minorities block reform through delay.
- For some of the key bargains, above all the EDIS–sovereign exposure exchange, there is no middle ground as currently framed.
- Mediocrity never produces the crisis that has historically forced European integration forward.
Why it is not safe
In the state of mediocrity Europe has survived a sovereign debt crisis, a pandemic and an energy shock. But the conditions that made it survivable are ending. Technology means standing still is itself a choice. Mediocrity has no common institutions that can carry weight in a crisis. The next financial crisis will be different from previous ones. Risks have shifted from the banking sector to less regulated areas.
Deepening capital markets without extending oversight to non-banks builds a larger system on a smaller safety net. Finally, geopolitics has raised the price of dependence. In finance, the alternative to European integration is not national self-sufficiency but reliance on others.
Ten decisions
The list of what is needed is shorter than the literature suggests:
- Make EU issuance permanent and fund it.
- Settle EDIS and sovereign-concentration charges as one package.
- Conclude Crisis Management and Deposit Insurance (CMDI).
- Supervise pan-European infrastructure at European level.
- Create a 28th regime that is real.
- Issue a digital euro that works as a genuine public alternative.
- Decide now on the wholesale settlement asset for tokenized markets.
- Extend macroprudential and resolution tools to non-banks.
- Treat operational resilience and AI model risk as market infrastructure.
- Strengthen funded pensions.
Items 1–5 decide whether the scenario of convergence stays within reach. Items 6–9 decide whether Europe controls the resulting market. Item 10 decides whether household behavior actually changes, which is the test that ultimately matters.
Convergence is a hard ask, but a specific one: ten known issues, most of them already drafted. What Europe should not do is keep treating the absence of catastrophe as proof that its architecture is adequate. The equilibrium is comfortable now, for the people currently making the decisions, and that is exactly the problem.
The full paper, "Completing Capital Markets Union and Banking Union in the Digital Age," is part of CEPR's Europe 2050 series.
Blog entries represent the authors’ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
Authors:
Florian Heider is Scientific Director and Co-Director of the department Financial Intermediation at SAFE.
Loriana Pelizzon is Deputy Scientific Director, Department Director of "Financial Markets" and Coordinator of Gender Equality at SAFE.
Claudia Schaffranka is Co-Head of the Policy Center at SAFE.
