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The European Union’s (EU’s) market capitalisation (or the total market value of shares for listed companies) was only EUR 10.4 trillion at the end of 2022, compared to EUR 38 trillion in the United States—in other words, it was less than one-third of US market capitalisation. Furthermore, turnover of EU shares (a measure of liquidity) remained completely flat from 2016 to 2022, while this measure increased by 40 percent in the United States over the same period.
There are, of course, multiple contributing factors to this crisis, but two initiatives are underway that may help to reverse the decline. For example, completing the Markets in Financial Instruments Regulation (MiFIR) review with the right focus could help boost secondary-market liquidity. This review is an important moment for Europe’s capital markets as policymakers consider how to enhance the competitiveness and attractiveness of EU capital markets at the international level.
Europe also aims to improve primary-market issuance through the EU Listing Act, which, once implemented, can simplify access to European capital markets and streamline the listing process as well as post-listing requirements.
Navigating the complexities of the EU’s regulatory framework
Part of the EU’s equity problem is the complex regulatory framework governing how its markets function, including certain restrictions that do not apply in other markets. For banks, explaining this complex regulatory framework to international clients and persuading them to still want to transact in the EU is a long, involved process.
In the EU, rules on share trading require investment firms to ensure that trades occur only on an EU-regulated market or multilateral trading facility. The trading amounts on certain trading venues are capped in favour of so-called public venues. Originally, this requirement was meant to increase transparency, yet it has led to firms being unable to trade in the most liquid markets or pursue the best execution for their clients. Ultimately, this can limit competition and deter investment.
In addition, the costs of complying with regulations and administrative burdens can also disincentivise investment. European issuers face higher capital costs as investors require liquidity premiums for investing in securities that cannot easily be converted into cash. Over time, this impacts where businesses list, making the US more attractive in the long run.
The role of MiFIR
To enable equity markets to thrive, Europe needs a well-developed equities consolidated tape. This tape will provide a window into liquidity across Europe and be accessible to investors. An example is the fund manager in Singapore, who wants to look at Europe as one single market and have the ability to invest in the most liquid markets to construct a deeper and more varied portfolio...
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