Germany’s extraordinary reaction to UniCredit (UCG)’s overtures towards Commerzbank may just have killed the European banking union and made a mockery of what was assumed to be long-run political support for it. Political support that events have shown to be false, or least a flagrant case of Nimbyism (i.e., not in my backyard).

The plan for an EU banking union was conceived in the aftermath of the Global Financial Crisis (GFC) of 2007-08 and formally adopted by member states in 2012. The intention was, and still is, to create a centrally supervised, deeply integrated, single EU banking market. Banking union sits alongside a similar plan for capital markets union. Both are fabulous ideas in principle. Both have made progress. Neither is complete.

EU policymakers and national politicians have backed banking union – at least publicly – as being integral to the bloc’s economic and financial sovereignty. Policymakers have long bemoaned what they have referred to as banking parochialism, where activities tend to be conducted within national borders. The urgent quest to create European banking champions to rival US and Chinese banking behemoths has been overdone in my view, but the basic aspiration to create European banks big enough to provide requisite banking services at scale to support the needs of EU multinationals globally and global multinationals in the EU is a reasonable one.

But here’s the problem: banking union demands a process of transformational cross-border consolidation to reduce fragmentation. Europe has too many small banks and too many medium-sized ones (relative to their US peers). The irony is that the fierce banking re-regulation implemented in the wake of the GFC to eliminate the possibility of a repeat performance has made cross-border banking consolidation uneconomic and extremely cumbersome.

But the thinking has been that as long as political support is there, a union will eventually be forged as rules are updated over time to recognize two realities: first, that EU banks are in much better shape today from the perspective of profitability, solvency and capital; second, that the regulatory priorities of 2008 have receded and new priorities have emerged (like economic and financial security). Such that, overly stringent rules can be relaxed without undermining the integrity of the regulatory framework that has been put in place.

Anywhere but here

But take away political support and the construct of banking union risks keeling over. So to Commerzbank… Germany’s aggressively negative reaction to a potential takeover of Commerzbank –  the bank in which Germany’s federal government still holds a 12.11% stake (a hangover from the GFC) by UniCredit, the pan-European, Italy-headquartered banking group that already has a big stake in German banking through its ownership of HypoVereinsbank – was surprising to say the least.

Surprising, that is, in light of the big push in recent months by official taskforces and high-level reports fronted by EU elder statesmen (Mario Draghi, Christian Noyer and Mario Monti) to push ahead and complete unfinished aspects of the banking and capital markets unions and to improve European competitiveness. It was barely a year ago that German Chancellor Olaf Scholz and French President Emmanuel Macron effusively backed the French-German roadmap for the capital markets union.

The events surrounding UCG and Commerzbank have been frontpage news for weeks, so no need to go into detail. Since UCG first notified the market on September 11 that it had acquired roughly 9% of Commerzbank shares, its stake has increased to 21% and a regulatory filing has been submitted to allow an increase of up to 29.9%, just below the level at which it has to launch a formal takeover.

Enter rampant media and investor speculation about a full takeover; a series of flummoxing, no-doubt-carefully-crafted dissembling comments from UCG about its intentions; but above all, a vicious political backlash in Germany, starting from the top. “Unfriendly attacks, hostile takeovers are not a good thing for banks, and that is why the German government has clearly positioned itself in this direction,” Chancellor Scholz is reported to have said about UCG’s actions.

And it got personal: during a protest outside Commerzbank’s Frankfurt HQ, its deputy chairman Uwe Tschaege was reported as saying, in reference to comments by UCG’s chief executive Andrea Orcel around improving the German bank’s operating efficiency, “I feel like vomiting when I hear [Orcel’s] promises of cost savings.” Meanwhile, Germany’s Ver.di trade union, fearful of multiple job losses if a merger of HypoVereinsbank and Commerzbank goes ahead, said it would fight with all means for Commerzbank’s independence. Hard to see where UCG goes in the face of such opposition.

Interestingly, UCG invoked banking union as part of its narrative around Commerzbank, saying union is key to boosting the EU’s economic success and the prosperity of its nations, as well as ensuring growth and competitiveness in the German banking sector.

In the light of circumstances, that’s almost funny.