If there is one discipline in which the European political class – whether of a sovereigntist persuasion or with a supposedly liberal bent – deserves an Olympic gold medal, it is the triple somersault of consistency.

Take a typical day in the corridors of power. In the morning, during yet another extraordinary summit in Brussels, our leaders step into the shoes of proud continental leaders. Faced with Washington’s tariff threats or yet another protectionist manoeuvre from across the Atlantic, there is but one watchword: unity. They shout themselves hoarse trying to explain to the international markets that the European Union is an economic giant comprising 450 million consumers, a monolithic bloc ready to achieve critical mass, strike back blow for blow and demand respect for its Single Market.

Then, around lunchtime, those same leaders board the first flight back to their respective capitals, shed their EU attire and slip back into the roles of provincial feudal lords. And that’s when the farce begins.

The paradox of the ‘internal duty’ and the farce of the Golden Power

And so it is that this Europe, which appears strong and united to the outside world, turns out, on the inside, to be a confederation of small states jealously guarding their own little fiefdoms. The favourite battleground? Finance and the banking sector.

When it comes to bank mergers, the rhetoric of the free market and the free movement of capital undergoes a sudden and miraculous transformation. The spectre of protecting the ‘national interest’ looms large, and governments pull the doomsday weapon out of the drawer: the Golden Power.

Originally conceived as an instrument of extreme strategic defence – to prevent critical infrastructure or defence companies from falling into the hands of autocratic powers outside the EU – it has been transformed into the political weapon of choice for domestic governments seeking to tighten their grip on the governance of local banks.

Recent chronic cases in European finance offer a grotesque snapshot of the situation. On the one hand, we have Italy, where the mere suggestion of a merger between two major national banks triggers political upheaval and threats of the ‘Golden Power’ clause. This leads to the logical absurdity whereby internal consolidation is blocked even between entities that were established, have grown and are regulated under the same Italian regulatory and fiscal framework.

On the other side of the fence we find Germany. Faced with UniCredit’s blitz on Commerzbank, Berlin responded with a blunt and indignant “nein”, peppered with accusations of “hostility”. A reaction that lays bare the blatant schizophrenia of our financial sector: whilst on the external front the EU claims to present itself as a monolithic bloc of 450 million consumers, on the internal front individual countries brandish the ‘Golden Power’ and national vetoes as soon as the risk of genuine banking integration becomes apparent.
In short, we are all pro-Europe and champions of the free market, but only ever when it comes to other people’s banks. When the prospect of a major Italian-led pan-European group threatens to get its hands on a slice of the German banking sector, the EU’s dogma melts away in the heat of domestic industrial sovereignty.

The schizophrenia of politics

One might wonder whether our ruling classes are truly ignorant of the fundamentals of economics. The answer is no. It is not a question of ignorance: it is something far more mundane and depressing, namely short-term electoral calculations.

If we look at the leading figures of the Italian political system, we will see that the list of culprits is long and cuts across party lines. On paper, at conferences and in election manifestos, they are all devoted champions of integration. They agree with the diagnosis: we need the Capital Markets Union,a fully-fledged Banking Union complete with a single deposit insurance scheme (EDIS), and an end to the requirement for unanimous voting. They know full well that ‘slapping each other in the face with tariffs’ with trading partners is economic nonsense.

Yet, when the going gets tough and we move from theory to day-to-day practice, the temptation of ‘tactical protectionism’ overrides any solemn promise. ‘Defending’ the bank next door or reassuring the local banking foundation wins far more votes in the short term than the abstract idea of building a major pan-European banking player. People invoke the ‘Europe of markets’ to lecture others, yet they fortify their domestic borders for fear that credit decisions might be taken across the border.

The ‘28th regime’: a small step in the fog of vetoes

Against this backdrop of paralysis, a few tentative, common-sense ideas are nevertheless trying to gain ground. There is much talk, for example, of the so-called ‘28th regime’: a single European regulatory framework for companies and contracts, to be used as an optional alternative to the 27 national legal systems. The idea is simple: to allow businesses and financial intermediaries to choose a single set of rules valid throughout the Union, thereby bypassing in one fell swoop the jungle of bureaucracy, local practices and disparate codes.

Let’s be clear: this is a ‘small’ step, an optional fast-track that, on its own, does not resolve the issue of fiscal union or banking protectionism. It is the classic attempt to circumvent regulatory obstacles rather than break them down. Nevertheless, it represents an important pragmatic signal. It demonstrates that there is an awareness of the costs of fragmentation.

The problem is that even such a straightforward reform risks getting bogged down in the quagmire of individual national ministries. Because whenever a single European rule is proposed, there is always some champion of domestic sovereignty ready to cry foul over the encroachment on local powers.

The price of ‘Non-Europe’ and Draghi’s lesson

Meanwhile, whilst we’re playing at being Bourbon barons with the major banks, the real world is racing ahead.

Without a genuine Single Market for Capital and without continental banks with sufficient critical mass, European businesses remain structurally at a disadvantage. To finance major transactions or listings on global markets, they end up knocking on the doors of the American banking giants. Europeans’ savings remain tied up in domestic deposits, unable to flow into the continent’s digital, energy and industrial transitions.

On this point, Mario Draghi was brutally clear in his Competitiveness Report:

“Internal barriers are a relic of a time when the nation state was the natural framework for action. But it is now clear that acting in this way has brought neither prosperity to Europeans nor sound public finances. Only radical change can lead the European Union out of this situation.”

Draghi has exposed the emperor’s new clothes: the protectionist fragmentation of individual states is turning Europe into an open-air museum. ‘Defensive fragmentation’ does nothing to protect citizens or savers; it merely condemns them to strategic irrelevance and relative impoverishment in the face of giants such as the US and China.

Either true European champions or mere pretenders

The European Union finds itself at an existential crossroads. Either we have the political courage to complete integration – by creating a Banking Union worthy of the name, a single, uniform tax system, a fluid capital market and an effective political union capable of overriding national vetoes – or we must resign ourselves to reality. And the reality is that we will continue to be the classic earthenware pot forced to travel amongst iron pots.

Carrying on with the fairy tale of a Europe that is strong on the international stage whilst acting as the guardian of the beacon within our own national borders is no longer merely an ideological contradiction.
It is a luxury that the real economy can no longer afford. If our governments truly wish to defend the national interest, they must stop using the ‘Golden Power’ as an internal tariff and finally have the courage to nurture the European champions of tomorrow. Otherwise, the market will wipe out our little fiefdoms.