By Ferdinando Giugliano

THE SCANDAL at Wirecard AG hasn’t just exposed a multi-billion dollar hole in the accounts of one of Germany’s most hyped fintech companies. It has also revealed a void at the heart of the country’s regulatory regime.

Angela Merkel’s government needs to ask itself some tough questions about the effectiveness of BaFin as a watchdog for its financial markets, including whether it should continue in its present form. But this is a European problem too.

The supervisory failures are so bad that the European Union is complaining about the possible damage to its own reputation as a safe place to invest. Brussels will rightly open an investigation into the Wirecard fiasco. One hopes that this will accelerate the process toward a stronger pan-European regulatory body that might overcome the tendency for national supervisors to go easy on their domestic companies.

The European Securities Markets Authority, the EU’s market regulator, needs to be given a central role in governing the continent’s companies, as has already happened with the European Central Bank’s oversight of banking. The ECB hasn’t been a perfect supervisor: It could have put more pressure on Deutsche Bank AG, Germany’s struggling flagship lender. But it has done a better job than BaFin, which failed to adequately monitor the German banking system before the financial crisis.

Wirecard’s collapse is certainly a humiliation for Germany’s supervisors. A number of short sellers, and a group of Financial Times (FT) journalists, have for years been reporting disturbing facts about the company and, in particular, the reliability of its accounts. BaFin failed to follow up speedily on their work, despite receiving tips from a whistleblower and complaints from other regulatory authorities. Instead, it pointed the finger the other way: banning the short selling of Wirecard stock temporarily and opening an investigation into the FT’s reporters.

Even after the company admitted that it couldn’t locate 1.9 billion euros ($2.1 billion) of cash, the German establishment was slow to acknowledge the gravity of the situation. Felix Hufeld, the head of BaFin, issued an apology, but he also said Wirecard was considered a technology company rather than a financial institution — a bizarre attempt to deflect blame given that Wirecard owned its own bank. Olaf Scholz, Germany’s finance minister, initially said that “the supervisory institutions worked very hard and they did their job.” He has since changed tack, demanding a rethink of Germany’s regulatory structure.

BaFin’s problems are structural and cultural. It is overseen by Germany’s finance ministry, meaning it lacks independence from political meddling. It may have also struggled to understand the world of fintech: Wirecard’s byzantine payment-transfers business was difficult for outsiders to make sense of. But shouldn’t that have raised its own concerns?

The EU is right to be putting the heat on Germany. Valdis Dombrovskis, the vice-president in charge of financial services, said in an FT interview on Friday that ESMA should lead a probe into BaFin’s behavior. The Commission could follow up with its own formal investigation. Provided these inquiries have teeth, they would show that even Germany is not beyond EU scrutiny.

The Commission should also accelerate plans to overhaul ESMA. At the moment, it is little more than a collection of national regulators, with no real powers of its own. Unsurprisingly, it failed to pick up what was happening in Germany. The Wirecard probe will be a key test of its independence. BaFin executives sit on the ESMA supervisory board.

A stronger, centralized markets regulator might even help deliver some EU states’ dream of a “capital markets union.” This aims to create a true pan-European equity market, and it would be a crucial step to strengthening the bloc’s financial stability.

A single market regulator would doubtless have its failings. It would be subject to national lobbying, especially if its executives weren’t independent enough. There would still be problems in how to oversee companies that operate in multiple jurisdictions beyond Europe. Still, a strong pan-European watchdog would have more muscle to deal with international counterparts.

Much like the financial crisis exposed the cozy links between lenders and banking supervisors, the Wirecard scandal is a reminder of what’s wrong with the balkanized regulation of the securities markets. The EU should seize on this opportunity — and Germany should not get in the way.