Breaking the deadlock: A single supervisor to unshackle Europe's capital markets union

The debate about a European Union single market for nonbank financial services goes back decades. In recent years, the economic and strategic case for the idea, rebranded as capital markets union in 2014 and included in a broader concept of savings and investments union in 2024, has strengthened. But progress towards that goal has been embarrassingly modest. This working paper argues that supervisory integration--the pooling of capital market supervision at the EU level--is the only realistic option to create a foundation for the successful development of competitive capital markets on a European scale. This could be achieved through a radical transformation of the European Securities and Markets Authority (ESMA) into a single, independent, and authoritative European supervisor. ESMA would gradually take over the jobs currently done by national capital market and audit supervisors and would replace them with its own network of national offices in EU countries. This consolidation would undercut the current incentives for market fragmentation, competitive distortion, and supervisory arbitrage, while respecting the European Union's multiplicity of financial centers, diverse market environments, and differentiated national social models. It would also represent a major simplification of the current arcane decision-making processes, allowing the European Union to move closer to the vision of a single jurisdiction for capital markets.