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The majority of EU states reject the push for capital market reform

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More than a dozen smaller EU states resisted efforts to unite Europe's fragmented capital markets, highlighting the agonizing politics surrounding decades-long financial reform efforts.

France recently led a push – backed by Italy, Spain, the Netherlands and Poland, some of the EU's largest economies – to revive reforms to deepen market integration and centralize supervision.

Paris argues that reforming financial markets would help attract private capital to Europe's huge investment needs in defense and the green transition, amounting to hundreds of billions of euros a year.

But at a summit on Thursday, the majority of the 27 EU member states faced strong opposition to the moves. They are concerned about relinquishing national control and giving Brussels more supervisory and regulatory powers.

“As a small country, we don’t have many competitive advantages, but we have a very competitive tax system, so please don’t take it away from us,” Estonian Prime Minister Kaja Kallas said on Thursday.

After several hours of heated discussions, EU leaders reached a compromise and postponed the decision on centralizing supervision until the European Commission reports on whether such a move was justified. This fell short of France's demand to give more powers to the Paris-based EU financial regulator Esma.

Chancellor Olaf Scholz supported Paris' demands, a position that put him at odds with his own finance minister.

Although Berlin has traditionally opposed further centralization of supervision, it recently supported a revival of the so-called Capital Markets Union (SME) project, suggesting that at least part of the German governing coalition is in favor.

Liberal German Finance Minister Christian Lindner continues to oppose giving Brussels supervisory powers, saying it would impose additional costs on the financial industry.

But Scholz, a Social Democrat, is sympathetic to the idea that integrating capital markets should be a top priority to try to reverse Europe's outflow of capital to the United States, according to two people briefed on the leaders' talks.

Leaders on Thursday also called for “harmonization of relevant aspects of national corporate insolvency frameworks” but watered down hints of aligning their corporate tax laws after resistance from Ireland and others.

Such measures were part of the original Capital Markets Union, adopted almost a decade ago, and remain highly controversial.

“We have had a very long debate because we start from different points of view, but it is also a crucial battle if we want to be successful in the next phases,” French President Emmanuel Macron said after the summit.

The backlash became clear before the summit when ambassadors from a group of smaller nations led by Luxembourg objected to the plan, according to five people familiar with the discussion.

Austria, Bulgaria, Cyprus, the Czech Republic, Ireland, Croatia, the Baltic countries, Malta, Romania and Slovenia also joined the rebellion, arguing that central oversight would impose additional costs on their national financial industries, giving larger markets a competitive advantage would provide.

Luc Frieden, Luxembourg's prime minister, said on Wednesday that reforms to the EU capital market were needed to avoid over-regulation and over-centralization. “We want a pragmatic approach,” he added.

Centralizing oversight is “not in the best interests of all member states and certainly not in the best interests of smaller member states,” Irish Prime Minister Simon Harris said on Thursday.

Additional reporting by Laura Dubois

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