The EU’s plan for a Savings and Investment Union risks falling flat unless it completes the banking union first, warns Amundi’s Mahmood Pradhan.
Pradhan, head of global macro at the Amundi Investment Institute and former deputy director for Europe at the International Monetary Fund, argues that Europe still lacks a single market for banking. “Without resolving the core issues of cross-border resolution and liquidity, any talk of an integrated capital market is wishful thinking,” he told Investment Officer.
Cross-border constraints
Pradhan pointed to ING’s operations in Germany as a clear example. “The savings ING raises from German households are ring-fenced by German supervisors. Those funds cannot be deployed elsewhere in the eurozone, for example, to finance SMEs in Portugal. That’s not a single market,” he said.
Fragmentation persists despite the establishment of European banking supervision under the European Central Bank and the Single Resolution Mechanism. Intra-European banking flows have even declined since the banking union was launched in 2014. “Banking has become more national than European,” Pradhan observed.
National supervisors continue to ring-fence capital and liquidity to protect local taxpayers in case of bank failure. “Who is on the hook if a bank fails? That’s still largely a national decision.”
No EDIS, no mergers
One unresolved obstacle is the lack of a common European Deposit Insurance Scheme (EDIS), the third pillar of the banking union. Despite years of technical groundwork, aligment of national deposit guarantee schemes across the EU, and political agreement in principle, EDIS remains stalled, primarily due to resistance from the German banking sector, including the Sparkassen and Landesbanken.
“I’ve worked for years on this at the IMF, and I’m skeptical we’ll ever get a true EDIS,” Pradhan said. Yet he added that banking union progress doesn’t hinge on deposit insurance alone. “What’s really blocking progress now is the lack of trust between national authorities, the so-called home-host problem. This makes consolidation virtually impossible.”
Cross-border mergers remain politically sensitive. Pradhan cites reactions to past suggestions that Italy’s UniCredit might acquire Germany’s Commerzbank. “Jens Weidmann, the former Bundesbank president, called it backdoor debt mutualisation. Such rhetoric reinforces resistance to financial integration.”
Savings versus markets
Europe’s overreliance on bank deposits illustrates the broader challenge. Bank savings account for nearly 80 percent of household financial assets. The continent has a credit-based financial culture rather than an equity-based one, for historical and cultural reasons. “We don’t need this many banks, and they’re not profitable enough. But no politician wants to close branches in small towns,” Pradhan noted.
For a true savings and investment union to emerge, both pension reform and incentives for retail investors are essential. “We need banks to offer and promote low-cost savings products like ETFs. But they aren’t doing that now. There’s not enough incentive.”
He pointed to successful examples in the Netherlands and Sweden, which offer second-pillar pension schemes with tax advantages. “We should take those lessons seriously. Many public pensions are unsustainable in the long run, and Europe needs to build a savings culture that goes beyond bank accounts.”
Gradual progress possible
As the EU targets 2027 as a milestone for the savings and investment union, as highlighted in the Letta report on the future of the single market, Pradhan urged caution. “I’m glad Letta and others are raising the urgency. But this won’t be solved with deadlines or directives from Brussels. Real progress depends on national governments embracing reform, and that means breaking vested interests.”
Even modest shifts would be meaningful. “If in five years’ time, just five to ten percent of the funds currently in bank deposits had shifted into long-term investment vehicles, that would be real progress,” he said.