A European Capital Markets Union: Incremental Progress and Enduring Obstacles

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German Finance Minister Lars Klingbeil talks to the media before the start of an Eurogroup ministers meeting at the EU headquarters in Brussels, Belgium, on March 9, 2026.

While the European Union will make incremental progress on a capital markets union (CMU) in the coming years, a fully unified market remains unlikely in the short to medium term, which will limit immediate reductions in financing costs and strategic autonomy but will gradually improve access to capital, market efficiency and resilience for European businesses over time. In recent months, efforts by the European Union to advance its long-standing CMU project have gained renewed urgency amid rising geopolitical risk, weak economic growth and mounting pressure to improve financing conditions for European businesses. Most recently, in a Feb. 19 interview with The Wall Street Journal, European Central Bank President Christine Lagarde reiterated the need to establish a CMU to lower financing costs for European companies and increase European competitiveness. The CMU seeks to create a single, integrated capital market across all EU member states by harmonizing rules and legislation to facilitate the efficient allocation of savings, thereby lowering financing costs and generating higher, risk-adjusted financial returns. It would establish the financial equivalent of the single market for goods by setting common rules that would allow savings and investment to move between member countries with less friction and lower transaction costs, in turn lowering the cost of capital and diversifying risk for savers and investors.

The EU capital market is highly fragmented due to differences in national regulations across the 27 member states. This means that different laws and regulations apply to financial institutions operating in different national jurisdictions. It also means that operating across all jurisdictions is more costly to individual companies.
The CMU project is not a single law but a long-term "Action Plan," first launched in 2015, subsequently updated in 2020.
Renewed impetus to establish a pan-EU CMU is also driven by rising U.S.-EU economic tensions and the growing fear among EU policymakers that the administration of U.S. President Donald Trump might weaponize financial relations, as it has in trade. As such, it can be seen as part of the broader goal of enhancing European strategic autonomy.

The European Union is seeking to improve the functioning of its financial markets and lower the cost of capital in view of weak economic growth, competitiveness challenges and increased financing needs. Compared with the United States, Europe's financial markets have always been more fragmented, which adds to the cost and difficulty of moving investments and savings between EU member countries. However, the European Union's increasing financing needs in terms of defense, social welfare and the green transition have increased urgency to reduce the cost of capital by creating a more efficient and larger pan-European capital market. The main obstacles in terms of harmonization are inconsistent insolvency laws, differing withholding tax regimes and different securities laws, which discourage cross-border investment due to higher legal and transaction costs. By diversifying funding sources, especially for bank-financed small- and medium-sized enterprises, the cost of capital for smaller companies would decline with the establishment of a CMU. Similarly, a more competitive and efficient European financial market would attract more venture capital and investment from companies outside Europe. As private pension savings play a far less prominent role in Europe than in the United States, Europeans often save in low-interest bank deposits rather than the stock market. By reducing the risk of cross-border investment, the CMU would help increase savers' propensity to invest in higher-risk, higher-return assets elsewhere in the European Union, while reducing transaction costs.

In contrast to the United States, where corporate funding primarily comes from capital markets, Europe's corporate sector is heavily dependent on bank loans, which account for an estimated 70% to 80% of funding for European companies. But while banks are a much more important source of financing in Europe than in the United States, they are also much more risk-averse due to the nature of their business and stringent regulations.
Another important obstacle to lowering financing costs in Europe is securitization (i.e., transforming banks' loans into tradable assets to free up their balance sheets). By allowing large investors to operate more easily across national markets, the CMU, if accompanied by relevant regulatory changes, could help free up banks' lending capacity, lower the costs of capital and/or make more financing available to the European economy.

One way to move forward with reform is by way of a "28th regime," which is a legal concept designed to bypass the 27 different sets of national laws that currently fragment European financial markets; alternatively, a subset of countries may move forward with harmonizing reform in the context of "enhanced cooperation." Instead of trying to force all 27 countries to change their laws, such as bankruptcy laws, security laws and national taxation regimes, the European Union is considering creating a parallel, optional set of rules that sits on top of national systems, called the 28th regime. This structure would essentially be a "European legal passport" that gives any participating European financial institution the right to operate in all 27 jurisdictions under a single license or authorization. Alternatively, ECB President Lagarde suggested that a subset of willing countries could move forward with harmonization measures, with others joining as they see the potential benefits of reform. This strategy could function under the "enhanced cooperation" procedure described in Article 20 of the Treaty on European Union. However, if other EU countries do not eventually join the initial arrangement, the resulting CMU would be less far-reaching and generate fewer economic and financial benefits than one under the 28th regime, even though legally it would be equally binding and subject to European Court of Justice review.

The so-called Letta and Draghi reports of 2024 and 2025 identified the 28th regime as the "silver bullet" for European competitiveness, meaning that a pan-European capital market would lower financing costs and make European capital markets a more attractive location for investment, raising debt and issuing equity. But it would not establish a pan-European banking market. Higher financing costs are only one reason for reduced European competitiveness; in addition to excess regulation, high taxes and higher energy costs, Europe also faces challenges on account of a larger manufacturing sector, which is facing increasing competition from China, especially in automotives.
Enhanced cooperation is a procedure that allows a minimum of nine EU member states to establish advanced integration or cooperation in a specific area without the participation of the remaining countries. It is designed as a last resort to overcome legislative deadlocks, ensuring that the entire union is not held back by a few dissenting members while keeping the door open for others to join later.

Long-standing disagreements exist among member states over the CMU concerning sovereignty, regulatory control and the future structure of Europe's financial system. While there is broad consensus on the need to deepen and integrate EU capital markets, governments diverge on how far authority should shift to the EU level. France has generally favored stronger central supervision to ensure uniform rule enforcement and strengthen Europe's financial autonomy, whereas Germany and several other countries remain cautious about transferring powers from national regulators, reflecting both legal traditions and domestic political sensitivities. Meanwhile, smaller financial centers such as Ireland and Luxembourg worry that greater harmonization could erode competitive advantages rooted in their domestic legal and supervisory frameworks. Resistance also reflects concerns that expanding market-based financing could weaken traditional bank-centered systems, particularly in economies where regional banks play a prominent role, such as Germany and Italy.

France supports the equivalent of a "European SEC," which would have substantially more power to supervise markets centrally than the current European Securities and Markets Authority, which has 27 different national regulators. Paris argues that centralized supervision would help avoid a scenario in which different national regulators interpret or enforce rules under the 28th regime differently.

Based on the Draghi report's recommendations, the European Commission and EU member states are seeking to fast-track the establishment of the CMU despite ongoing disagreement. Many technical changes required to establish the CMU are in the works, and negotiators are making progress on the less controversial topics, such as data sharing or reducing red tape. However, harmonizing the bankruptcy and tax regimes will likely prove an insurmountable obstacle, as harmonization would reduce the competitiveness of some countries and centralization would limit their ability to soften the implementation of the new legal and tax regime. It is possible that a smaller subset of countries will agree on common rules, but this would fall short of a pan-European capital market as envisioned under the current European Commission proposal, limiting its impact. It is therefore unlikely that agreement among all 27 EU members, or even between France and Germany, will emerge under the current commission (2025-29), even if minor progress on less important rules occurs.

In January, the phased rollout of the EU Listing Act began, which helps simplify the rules for companies, especially small- and medium-sized companies, going public, mainly by reducing requirements under prospectus regulation. In June, rules pertaining to market abuse will be relaxed, such as reporting thresholds for executives' stock trading.
Further changes due to take effect in December 2026 will affect multiple-vote shares to make it easier for startup founders to retain greater control of their companies under initial public offerings and prevent ongoing migration of entrepreneurs to other jurisdictions, like the United States.
By the end of March, changes to the Systematic Internaliser regime will take effect, aimed at improving transparency in how large banks trade directly, without supervision. In June, further largely technical changes are supposed to be launched on prospectus standardization, as new EU-wide formats for investment documents will become mandatory. The roadmap also foresees the full implementation of the European Single Access Point, which is a "one-stop-shop" digital database providing free access to company data for investors.

While unlikely to happen anytime soon, a completed CMU that unifies corporate governance, taxation and bankruptcy regimes across all 27 EU member states would boost the efficiency and resilience of Europe's financial system, attract foreign investment, lower financing costs and eventually decrease European companies' reliance on U.S. capital markets. Developing deeper, broader and more efficient European capital markets would encourage European companies to supply and raise capital in Europe rather than the United States. This would reduce Europe's vulnerability to potential U.S. financial warfare under the Trump administration, such as restrictions on European companies and banks' access to U.S. financial markets and dollar clearing. It would also make the European financial system more resilient by diversifying risk away from bank financing. Additionally, a fully established CMU that resembles U.S. capital markets, including centralized supervision, would slightly boost to the euro's appeal as an international financial currency, though the euro's status as a reserve currency would remain hampered by the lack of a large, high-grade sovereign bond market, political fragmentation risks, and the absence of a full fiscal and banking union.