Ever since the euro was introduced in 1999, financial experts have predicted that it would lead to the sweeping, Continent-wide consolidation of many European industries, particularly the crowded banking sector. The dream was that a single European currency would leap over national priorities and prompt banks to reach across borders for merger partners, the better to compete with America's megabanks.

But a funny thing happened on the way to banking consolidation: nothing. Except for a few small deals, such as the 2000 takeovers of Bank Austria by Munich-based HVB, and Unidanmark by Swedish-Finnish lender MeritaNordbanken, banks have preferred to merge with homegrown rivals rather than competitors abroad. Until last week, that is, when the first big European cross-border deal was finally unveiled. Banco Santander Central Hispano, Spain's largest bank, agreed to buy British mortgage lender Abbey National for approximately €13.4 billion, creating Europe's fourth-largest bank in terms of market capitalization. "This is a unique opportunity to enter a very interesting market, which will add diversification, solidity and stability to our future results," Santander chairman Emilio Botín proclaimed.

So has the predicted round of consolidation begun at last? Er, not really. "This is not the beginning of cross-border banking mergers in the euro zone," says Francesco Giavazzi, an economist at Milan's Bocconi University. If anything, Giavazzi says, Santander's move in Britain demonstrates how many barriers remain to such transnational deals. Santander had already been blocked from taking over France's Société Générale in 1999 because the bid came from abroad. When Spain's Banco Bilbao Vizcaya Argentaria tried to merge with Italy's UniCredito Italiano the same year, Italy's regulator, too, balked at the idea of an Italian bank falling into foreign hands. In Abbey's case, U.K. competition regulations may have given Santander the edge.

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nginx/1.14.0 (Ubuntu) In December 2000, British rival Lloyds TSB offered €27 billion for Abbey, but the takeover was blocked by British competition authorities, who prefer to see multiple players in the €6.5 trillion U.K. banking sector. What is certain is that banks everywhere will be watching to see how Santander's Abbey acquisition, which still needs shareholder approval, pans out.

No one in Europe has more experience of bank deals than Botín, 69, who built Santander into a Spanish giant by two tie-ups in his home market. Santander is also heavily invested in Latin America, where it has a network of some 3,900 branches and 52,200 employees at a time when markets there are especially volatile. So in buying Abbey, Botín was seeking diversification. "The acquisition will balance Santander's risk while buying a bank with a critical volume that will allow it to reach the mass market," says Javier Bernat, an analyst with stockbroker Caja Madrid Bolsa.

Botín said he would be able to wring cost savings of €450 million from Abbey as well as increasing revenues by €110 million, for a total of €560 million in increased earnings by 2007. This could mean sweeping job cuts at the British lender.

Some question whether conservative British customers will remain loyal to the bank once it's in foreign hands. Indeed, many Abbey shareholders are pension funds and asset managers who, to maintain investment objectives, will have to sell if the bank becomes non-U.K. owned. Luqman Arnold, Abbey's chief executive, said he thought the deal would be similar to Wal-Mart's 1999 acquisition of British supermarket chain ASDA, which retains its own name and identity.

Whether the deal succeeds or not, Europe's banks remain ripe for more mergers. James Hamilton, an analyst at WestLB Equity Markets, says Germany may be next: "If you look at Germany, which is a relatively fragmented market, there is significant scope for consolidation." And German banks are sniffing at potential foreign partners. Deutsche Bank, the country's largest, held merger talks with U.S. behemoth Citibank, but the negotiations got nowhere. HVB has held talks with ABN Amro, Credit Suisse, BNP Paribas and Santander, but they all ended without a deal — for now. If Santander can thrive with Abbey, the long-awaited dream of truly European banking might yet come true.

• CHARLES P. WALLACE
• Will the first big European cross-border banking merger spark sweeping consolidation?