There is a whiff of unreality in the air in many member states of the European Union. Facing ever lower growth forecasts, some even blame competition for their troubles.

In a sense they are right, but for the wrong reasons. It is the lack of competitive pressures that lies behind so many of the ills Europe faces today. A competitive financial services sector is an essential ingredient in supporting economic stability and growth. In spite of the progress made in integrating financial markets in the EU, there are still obstacles that prohibit competition. This is most obvious in the retail banking sector. Very little cross-border merger activity has taken place. We are currently examining the various reasons for this (legal, economic, cultural and so on) and will present a report to the EU's economic and finance ministers in September.

The report will be based on a number of elements including economic and legal analyses of the present situation as well as input from market practitioners on their views about current obstacles. I want to set out a wide-ranging examination of the factors inhibiting cross-border mergers and acquisitions, warts and all. On this basis, I intend to raise with ministers various key issues that need to be tackled in order to improve the competitive environment for European banking.

One of the issues is the need to adapt EU legislation to the requirements of a dynamic economy. The current controversy about bank takeovers in Italy has helped to highlight some of the problems. For example, it seems absurd to me that if the competent authorities of one member state accept a company which is a viable bank in their territory, the competent authorities in other member states undertake a separate evaluation of the suitability of a well-established and supervised bank. In the specific case of ABN Amro's bid for Banca Antonveneta, valuable time was lost because, under the relevant legislation, the Italian authorities undertook an adjudication of the suitability of ABN Amro's management and shareholders. This meant requesting information from the Dutch authorities and evaluating it. In contrast, the Italian authorities would not have needed the same information to adjudicate on Banca Populare di Lodi, as they already know well the Italian bank's management and shareholders.

In the context of a competitive bidding environment, these delays could give a domestic bidder a clear advantage. This was never the intention of the EU's legislation. While banking authorities must have a role in reviewing the suitability of those in charge, this must be done in a clear and transparent way that does not allow any discriminatory treatment. I believe it should be possible to lay down conditions whereby a form of mutual recognition of bank shareholders could operate between competent authorities.

To redress this and other potential barriers, I will present before the end of this year an overhaul of the relevant provisions of EU banking legislation so that any legal obstacles or ambiguities can be removed. As well as the mutual recognition point, other aspects that need to be dealt with include setting out the relevant criteria and procedures to be followed by competent authorities in member states when assessing new shareholders of banks.

The relatively low levels of bank profitability in the EU make mergers and takeovers less attractive. Increasing returns to scale through efficiency gains, consolidation or otherwise are necessary if EU banks are to break out of this vicious circle of low returns on investment. In the US, the legislature gave the impulse necessary for consolidation to take place. The positive results are evident. The US industry is generally healthier and the economy is stronger. Through further efficiency, Europe can achieve similar beneficial results and ensure the efficient and liquid markets necessary to drive the EU economy. If we want financial institutions that are global participants in the years to come, a strong competitive domestic market is a basic requirement.

What is clear is that we cannot afford to keep important sectors of our economies sheltered from market forces. Whether it be financial services, car manufacturing or textiles, no one is well served by protectionism. Jobs "saved" today are usually at the expense of those who will come on to the job market. In addition, consumers pay higher prices. This is not the pathway that leads to sustainable growth levels. One thing is sure: if the European economy is to regain momentum standing still is not an option.

The writer is a member of the European Commission with responsibility for Internal Market and Services

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