Deregulating finance is in vogue in Brussels once again.
William Thomson is a Political Economist and Founder of Scotonomics. (www.scotonomics.scot)
Billed as simply a ‘technical reappraisal’, the European Commission has concluded its consultation on a framework to supercharge securitisation – the class of financial products blamed for the 2007-2008 financial crisis. Far from all options being on the table, the direction of travel is clear. More financialisation. And this time of the most dangerous kind.
There’s no secret that Europe’s policymakers have been stung into action after years of stagnant economic growth. Between 2023 and 2024, the EU area grew by 0.7%. Over the same period, the United States recorded an annual GDP growth rate of 2.4%. Cue ‘The Draghi report on EU competitiveness’, released late 2024.
The report was designed to feed into and crystallise the actions of the Commission’s Strategic Agenda for 2024–2029, on a “new plan for Europe’s sustainable prosperity and competitiveness.” The report highlighted some of Europe’s weaknesses, including its openness to global trade, its reliance on advanced technology and essential materials and minerals from overseas, as well as its high energy costs.
The report’s recommendations should be filed under business as usual. The EU, as a collection of neoliberal economies, settled on more of the same. More focus on innovation and R&D. Developing a stronger entrepreneurial culture and making it easier for businesses to access private finance.
The Private / Public finance mix
Presenting the report to the European Parliament, Mario Draghi announced that Europe needed an additional annual investment of €750–800 billion, with 80% coming from private finance and public money making up the final 20%. In sum, private capital must lead the way to prosperity. There is, of course, no other option in a neoliberal state.
The belief that restraining private money creation has dampened EU growth is a key assumption for the EU. This, in turn, almost naturally under financialised capitalism, led to a reevaluation of the EU Securitisation (EUSR) framework. This was met with a “wave of euphoria across the market”, reported Global Capital. The stage is set for the return of securitisation, a form of financing that pools assets, such as Small and Medium Enterprise (SME) loans or mortgages, into interest-bearing, tradable securities.
Back in the heyday of securitisation, the annual securitisation market in Europe was some €450 billion. And then the GFC happened. Most commentators laid the blame for the financial collapse at the door of securitised assets, especially those assets which pooled low-performing mortgages. It was therefore no surprise that the securitisation market stagnated for the next decade, only passing €100 billion per year in 2019. However, by 2024, the market reached €245 billion, more than half its pre-GFC level.
Securitisation is back
The narrative is one of consensus: the market is too small. It is overregulated, and securitised assets have an inappropriately high risk classification. The current situation ensures that securitisation is failing to deliver on its promised benefits. In sum, securitisation may be the key that unlocks Europe’s prosperity.
This policy push in support of securitisation is reflected in the stance of most major EU institutions and financial actors. Alexandra Jour-Schroeder of the European Commission calls securitisation “an underexploited tool” and argues that “revitalising this market” is necessary to “stimulate innovation” and meet EU strategic priorities. Christian Noyer, former Governor of the Bank of France, frames it even more starkly: “The EU’s focus on revitalising securitisation is not just a technical adjustment but also a strategic imperative”.
Europe’s political and institutional apparatus is now firmly aligned with industry demands. The reports, consultation summaries, and regulatory speeches present a unified front. Afme, an umbrella group for private capital markets, wrote, “A recovery in the securitisation market should play an important role in unlocking credit markets and supporting a wider economic recovery across Europe.” “Nothing is off the table”, according to Global Capital, quoting a leading advocate for ‘lighter regulation’. But in practice, there is no consideration of rolling back or downsizing the securitisation market. The case has been won. Europe will have less regulation and more risk-taking.
There seems to be little space for highlighting the significant concerns with securitisation
Before the policy momentum solidifies into legislative action, it’s worth investigating what others from outside the Commission/Industry axis consider securitisation’s role, and the broader role of private finance, should play in Europe’s prosperity.
In theory, the securitisation of assets spreads risk and increases lending capacity. However, in practice, securitisation has repeatedly amplified systemic risk, undermined transparency, and by increasing returns to the already wealthy has supercharged inequality. More broadly, there is the assumption that private capital markets are the most effective and stable mechanism to allocate finance—a claim that is still made despite all of the evidence from the GFC.
Finance Watch, which supports the need for a stable, profitable, and competitive European banking sector, suggest that the EU’s blanket support for securitisation is misguided. “A successful EU banking sector can only be built on a bedrock of financial stability”, it concludes.
Drawing on the work of Hyman Minsky (1919-1996), a leading American financial economist, calls to expand securitisation will further undermine Europe’s financial system. Minsky warned that financial systems tend to move toward fragility as stability breeds risk-taking. Many people considered that Minsky had his “moment” in the sun when securitisation punctured the global financial markets in 2007. However, Minsky’s Financial Instability Hypothesis speaks of an “economic system’s reactions to a movement of the economy” and “Institutional complexity” rather than individual events or moments. Minsky wouldn’t see the redrafting of the EUSR as the event that could tip the system, but rather as an example of a financial system becoming more fragile.
Modern Monetary Theory (MMT) offers a different yet complementary critique: why are we relying on complex private financial structures to fund essential investments in Europe, particularly in the green transition, when the public sector in Europe has the fiscal and monetary capacity to do so directly? Recently, the EU has amended its fiscal rules, which were designed to reduce government spending, to allow states to increase their defence spending. So why can’t the same principle work for ecological expenditure?
Economists Dirk Ehnts and Michael Paetz, in their article, The ECB as a Dealer of Last Resort from a Modern Monetary Theory Perspective discuss the assumption that public money is somehow inferior to private finance, “Since the 1980s, many countries have restricted the spending possibilities of democratically elected governments because they would supposedly not handle the money creation privilege. At the same time, private banks have been completely free to decide who gets loans and what they are used for. This constellation should not be understood as some kind of ‘normal’.”
The starting position – supported as we have highlighted by EU institutions and the finance sector – is an insistence that private capital markets must ‘do the heavy lifting’. This reflects outdated ideological assumptions, not economic necessity. If the EU can fund 20%, why not 30%, 50% or 80%? Where is the economic evidence to justify this split? The answer is, of course, there is none. In its place are institutions based on neoclassical economic assumptions.
What the Industry Wants: Deregulation and Revival at Any Cost
The wish list includes weakening due diligence requirements, reducing disclosure obligations and simplifying templates. The loosening of capital charges under Solvency II and LCR (Liquidity Coverage Ratio) rules. Moving toward “principles-based” regulation rather than rule-based oversight and improving the treatment of securitisation tranches to allow easier inclusion in banks’ high-quality liquid asset (HQLA) buffers.
As ever in financial regulation, what’s presented as a neutral process of technical calibration is in fact a deeply political process of reinforcing and extending an existing model—a model that has transferred wealth upwards and entrenched rentier power, and proven incapable of withstanding shocks. And here is the collective amnesia, as if the last 15 years of financial reform were bureaucratic overreach rather than a necessary response to systemic collapse predicted by Minsky.
The expected changes to the EUSR are not incidental. The financial sector is asking for lighter rules, all the while knowing that EU institutions will ultimately backstop them when things go wrong. The crisis losses will be socialised—again.
Significant shocks are coming. We are not in the stable, rules-based global economy that defined the last securitisation boom and ultimate collapse. The world is in an era of polycrisis—climate breakdown, geopolitical fragmentation, trade disruption and close to crossing ecological tipping points. The very nature of globalised, pooled asset vehicles makes them more vulnerable in this environment. To deepen securitisation now is to build a more brittle financial system at precisely the wrong moment.
Europe’s financial future should include the possibility of moving away from securitisation, rather than simply discussing how quickly to ramp up lending. But that ‘alternative’ view has been structurally excluded.
Framing this as any kind of ‘debate’ reminds me of a story about Rolling Stones royalties. An artist was negotiating what seemed like a fair deal—paying 50% royalties to the Stones for sampling one of their songs. But it turned out that they were caught up in the negotiation between the two songwriters. They were always destined to pass over 100% of the royalties. The debate taking place was simply whether Jagger would earn more than Richards.
A Global Race to the Bottom, of a European Alternative?
What further complicates this picture is the behaviour of the UK and the US, both of which are actively pursuing deregulatory agendas in financial services. The UK is moving toward a more “principles-based” regulatory regime for securitisation post-Brexit, while a second Trump administration is likely to accelerate financial deregulation in the US. This has led to predictable arguments from within the EU that Europe must follow suit or risk becoming uncompetitive – the core of Draghi’s whole case for prosperity, as if the US or the UK should be the example for any other nation.
Although the decision to increase securitisation has clearly been made, we must ensure that alternatives are put forward.
The EU has an opportunity to break with the short-termism and fragility of financialised capitalism. Instead of mimicking Anglo-American deregulation, Europe could build a new ecosystem for finance rooted in investment in the real economy, public banking, and increased deficit spending for purposes other than war. It could flip that 80%/20% private/public finance on its head and make the most of the “common debt” provisions included in Draghi’s proposals. This would not only insulate Europe from external shocks but could also offer a genuinely distinct model aligned with democratic and ecological resilience. Europe focused on people, place and planet. Not just profit.
The story of securitisation is a microcosm for all that is wrong with the Commission’s economic vision. It is based on a neoclassical framework that is built on the existing power of financial markets. The European project remains too wedded to a neoliberal, private-finance-first policy framework that prioritises market deepening over democratic resilience and productive investment. The finance industry, displaying Rolling Stones-like power, is left arguing who gets the spoils.
If the EU is serious about economic transformation and social cohesion, it must confront its default reliance on private capital markets by refusing to increase the support for securitisation and increase deficit spending to support a fair and just transition.
“Europe could build a new ecosystem for finance rooted in investment in the real economy, public banking, and increased deficit spending for purposes other than war. It could flip that 80%/20% private/public finance on its head and make the most of the “common debt” provisions included in Draghi’s proposals.”
It could, but it’s a racing certainty that it won’t.
“Although the decision to increase securitisation has clearly been made, we must ensure that alternatives are put forward.” Agree “could’ doing a lot of heavy lifting here!