|
|
At last year’s conference, I spoke about Europe’s fragmented capital markets and the urgent need for us to integrate them.
The main thrust of my argument was that Europe was facing transformative changes that came with huge financing needs, and that we would not succeed without mobilising private capital much more effectively.
I called for a “Kantian shift” in how we approach the capital markets union (CMU) project, moving away from bottom-up harmonisation to top-down integration.[1]
But as Martin Luther King said, “we are now faced with the fact that tomorrow is today.” And in that time, the urgency to integrate our capital markets has risen.
Since last year, Europe’s declining innovation position has come more clearly to light. The technology gap between the United States and Europe is now unmistakeable.
The geopolitical environment has also become less favourable, with growing threats to free trade from all corners of the world. As the most open of the major economies, the EU is more exposed to these trends than others.
CMU lies at the centre of all these challenges.
It is key for making our economy more dynamic and technologically advanced. While banks play an essential role in the European economy, we know that integrated capital markets are needed for financing early-stage, breakthrough innovation.
And it is key for becoming more resilient in a fragmenting world economy. Capital markets are the missing link for Europeans to turn their high savings into greater wealth – which will ultimately enable them to spend more and strengthen our internal demand.
However, this growing urgency has not been matched by tangible progress towards CMU, in large part because its implementation remains loosely defined.
Since 2015, there have been more than 55 regulatory proposals and 50 non-legislative initiatives, but breadth has come at the expense of depth. It has allowed CMU to be picked apart by national vested interests that see one or another initiative as a threat.
So if we are to achieve a “Kantian shift”, we need to refocus, exposing the core inefficiencies in the system and identifying a smaller number of initiatives with the highest return.
As I see it, the core problem of CMU is that the “pipeline” from savers to innovators is blocked at three key stages: entering, expanding and exiting.
First, European savings are not entering capital markets in sufficient volumes because they are concentrated in low-yielding deposits.
Second, when savings do reach capital markets, they remain trapped in national silos and are not expanding throughout the European economy.
Third, once savings have been allocated by capital markets, they are not exiting towards innovative companies and sectors owing to an underdeveloped ecosystem for venture capital.
These three blockages require different solutions, but they must be seen as a single problem, because they are self-reinforcing. Fewer high-growth companies means lower equity valuations and liquidity in EU markets and lower returns for savers.
In my remarks this morning, I will outline the key blockages I see in each area and present some actionable policy proposals that can resolve them.
Europeans save a high share of their income: around 13%[2] in 2023 compared with around 8% in the United States.
But typically, Europeans favour low-risk, liquid savings products. In Europe, approximately €11.5 trillion is held in cash and deposits. This is one-third of households’ total financial assets. In the United States, the figure is around only one-tenth.
This has two main consequences for our economy.
First, European households are much less wealthy than they could be. Since 2009, US household wealth has grown by around three times more than that of EU households.[3]
Second, the flow of savings into capital markets is much lower than it could be.
According to ECB analysis, if EU households were to align their deposit-to-financial assets ratio with that of US households, a stock of up to €8 trillion could be redirected into long-term, market-based investments – or a flow of around €350 billion annually.
So why are people not diversifying their assets?
A key issue is that retail investment in Europe is fragmented, opaque and expensive...
more at ECB