The European Commission has initiated an infringement procedure against Spain over legislation that allowed the government to condition the merger between BBVA and Sabadell, citing concerns that Spain exceeded its legal limits and violated the free movement of capital.

EU sources indicate that Spain's 2014 banking law and its 2015 decree grant excessive discretionary power to the economy ministry over banking operations, which are typically under the jurisdiction of the European Central Bank.

Brussels plans to act before the summer recess, potentially filing a complaint to the EU General Court, as the EU contends that Spain's actions undermine the EU's banking union and cross-border transaction integrity.

As the merger review nears its final stage, analysts are divided on whether BBVA should proceed, with some suggesting returning capital to shareholders and others seeing potential value despite regulatory hurdles.

BBVA has reaffirmed its commitment to the acquisition, emphasizing long-term shareholder value, though it acknowledges Spain's regulatory conditions could impact expected synergies.

The Spanish government defends its restrictions as necessary for protecting public interest, including support for small and medium enterprises and social policies, claiming these measures are within its legal powers under the Competition Law.

The case underscores the importance of regulatory proportionality and strategic resilience in M&A, highlighting how national governments may exploit legal ambiguities to delay or obstruct mergers.

The outcome of this dispute could set a precedent for future cross-border deals in Europe, impacting the balance of regulatory authority between national governments and EU institutions.

The EU views banking consolidation as vital for a unified banking union in the Eurozone, but political resistance and protectionist motives have limited such mergers, complicating efforts to strengthen the sector.

Spain's Ministry has acknowledged the EU's concerns and plans to respond within two months, defending the longstanding legislation as aligned with EU principles, while the EU emphasizes that only the ECB and competition authorities have the authority to oversee such mergers.

Despite government restrictions, BBVA continues with its bid, pending approval from Spain's stock market regulator, and the bank's chairman has criticized the restrictions as 'illegal'.

Investors are advised to navigate heightened political and regulatory risks in cross-border M&A, considering deals that align with EU goals and incorporating regulatory risk assessments into their due diligence.