Harmonisation or Optionality? The EU’s 28th Regime and the Future of Insolvency Law

The EU’s renewed push to integrate capital markets has placed insolvency law back at the centre of the policy agenda. Recent reports by Enrico Letta and Mario Draghi both identify insolvency law fragmentation as a major obstacle to deeper financial integration, while the EU’s Capital Markets Union — now reframed as the Savings and Investment Union — continues to emphasise the importance of more efficient restructuring and insolvency frameworks.

Against this background, the EU proposed a new Directive in March 2026 harmonising selected aspects of national insolvency laws. At the same time, however, the European Commission is pursuing a potentially very different strategy: the development of a so-called ‘28th regime’, an optional supranational legal framework existing alongside national systems. The recently proposed EU Inc. framework is the first concrete step in that direction.

In my current research, which I presented at the recent ECGI-LawFin Workshop, I discuss the problem that these parallel developments raise a fundamental institutional question for European economic governance: should the EU pursue integration primarily through mandatory harmonisation, or through optional supranational regimes that rely on market choice and regulatory competition?

The economic rationale for insolvency harmonisation is straightforward. Divergent national insolvency laws increase transaction costs for cross-border investment and lending. Creditors must assess recovery prospects under different legal systems, often characterised by significant differences in restructuring procedures, creditor hierarchies, judicial efficiency, and enforcement practices. These frictions are particularly problematic for the development of integrated European capital markets.

Moreover, insolvency regimes play a central role in determining access to finance, especially for innovative firms and startups. Investors and venture capital providers require predictable restructuring and exit frameworks. Several recent contributions to the EU Inc. debate therefore argue that Europe’s scaling problem is driven less by company law fragmentation than by the absence of efficient and predictable insolvency mechanisms.

Yet the case for harmonisation is more complicated than current policy discussions often suggest.

Insolvency law is deeply embedded in national institutional environments. It reflects broader economic and political choices concerning creditor protection, labour relations, judicial organisation, social policy, and corporate governance. As long as these surrounding institutional structures remain heterogeneous, a single European insolvency model may generate unintended distortions.

This problem is particularly visible when considering the diversity of European financial systems. Banking sectors differ substantially across Member States in terms of concentration, creditor structure, and financing patterns. A creditor-oriented insolvency regime may function differently in decentralised banking systems than in markets dominated by a handful of large financial institutions with significant bargaining power.

The newly proposed Harmonisation Directive itself illustrates the issue. Several of its key provisions, particularly regarding avoidance actions, are relatively creditor-friendly – but whether such an approach is equally suitable across all Member States remains uncertain.

More broadly, harmonisation creates a classic institutional dilemma: which national model should become the European standard? In practice, the answer is rarely determined solely by economic efficiency. European legislative processes inevitably involve political bargaining, lobbying, and compromise. The resulting framework may therefore reflect political feasibility rather than optimal regulatory design.

This concern matters because an efficient legal regime benefits from experimentation and adaptation. Regulatory competition can function as a discovery mechanism, allowing jurisdictions to test alternative solutions and gradually identify more effective legal arrangements. European company law provides an instructive example. Following the Centros line of case law, regulatory competition encouraged several Member States to modernise their corporate law frameworks in response to competitive pressures generated by more flexible foreign models.

Insolvency law has displayed similar dynamics. Over the past two decades, several Member States have adjusted restructuring frameworks in response to international competitive pressures and forum-shopping incentives. The EU Preventive Restructuring Directive itself was partly influenced by the perceived success of US Chapter 11-style restructuring mechanisms.

From this perspective, the emerging discussion surrounding a European 28th regime is particularly interesting.

An optional insolvency framework could combine some advantages of harmonisation with greater institutional flexibility. Firms operating cross-border could voluntarily opt into a European regime if it offered lower transaction costs, more predictable restructuring procedures, or more efficient liquidation mechanisms. At the same time, Member States would retain their domestic systems, preserving scope for continued experimentation and institutional diversity.

Importantly, such a framework would allow market actors themselves to determine whether the European regime creates genuine value. Successful elements could gradually diffuse into national systems through competitive pressure and regulatory learning rather than top-down harmonisation alone.

At the same time, the 28th regime approach also faces substantial obstacles. If it became sufficiently attractive, Member States might fear erosion of their domestic systems and therefore resist it politically. Previous optional-regime projects such as the once-proposed European Private Company and the Single-Member Company encountered precisely such resistance.

In addition, insolvency law cannot easily be isolated from adjacent legal fields such as company law, labour law, tax law, and judicial procedure. Any optional regime would therefore still depend heavily on national institutional infrastructures and enforcement capacities.

Nevertheless, the current debate reveals an important shift in European regulatory thinking. Rather than assuming that integration necessarily requires uniformity, policymakers increasingly appear willing to explore more flexible institutional models based on optionality and coexistence.

For insolvency law, this may ultimately prove the more promising path. Europe’s challenge is not simply to eliminate legal diversity, but to create frameworks that facilitate cross-border investment while preserving sufficient room for institutional adaptation and regulatory innovation. In that respect, the emerging 28th regime debate may turn out to be more significant than the proposed harmonisation directive itself.

Read my paper here. Comments are very welcome!

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Wolf-Georg Ringe is Professor of Law and Finance and Director of the Institute of Law & Economics at the University of Hamburg, and an ECGI Research Member.

This blog is based on a discussion held at the 7th LawFin Workshop The 28th Regime: An Effective Legal Architecture for Innovation in Europe?. Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.