Can Europe finally fix its capital markets?
Stung by its lack of competitiveness, the EU is making a new push to create a deep financial market. Some investors believe this time could be different
Markus Villig knows all about Europe’s aversion to investment risk. The chief executive of Estonian ride-hailing app Bolt “met almost every venture capitalist” on the continent before securing most of Bolt’s $1bn-plus in funding from US investors.
“The reason we lost out wasn’t [because rival apps] had a better product. It’s because they had access to more money,” Villig tells the Financial Times. “[US investors] were willing to take the risk, even on an Estonian legal entity. European VCs just couldn’t commit at that level.”
This has become a familiar tale in Europe, as its best companies often look to the deep capital markets in the US instead of seeking backing at home, while other potentially successful companies struggle for finance. Rich in savings, Europe struggles to fund its future.
“[Europe] probably missed out on three to five trillion euros of wealth creation because of this,” Villig argues. “If we don’t fix our capital markets, we’re going to keep losing in tech, in innovation, in everything that matters.”
Stung by the lack of competitiveness of its economy, the issue of its underfunded companies has become one of the top items on the European political agenda.
Brussels is making a new push to foster deeper and more integrated capital markets across the EU, with a focus on reducing fragmentation, improving access to financing and boosting retail investment. Ursula von der Leyen, the European Commission president, has made the project one of the priorities of her second term.
This year, the commission launched the “savings and investments union” initiative, a policy programme aimed at mobilising the EU’s vast pool of household savings and channelling them more effectively into productive investments.
The commission’s proposals include reviving securitisation, centralising supervision and facilitating retail investment — alongside concluding years-long negotiations over insolvency laws and completing the banking union.
For many in Europe’s business and political elite, the issue is not just about venture capital but also what the leakage of European listings to the US represents. Taken together, these problems represent a structural threat, rather than just a missed opportunity.
“Europe has uniquely high savings, but we fail to turn them into productive investment,” says Stéphane Boujnah, the chief executive of Euronext, which operates stock exchanges in seven European countries. “We need to rewire the system — and fast.”
The continent’s fragmented financial landscape is a big part of the problem, he adds. Europe’s capital market is in reality a hotchpotch of national systems, each with different rules, regulators and investment cultures. Its most significant financial centre, London, is no longer in the EU.
The contrast with the US, where unified capital markets and post-trade systems alongside a single market regulator underpin a culture of risk-taking and equity investment, is stark.
“You cannot build a thriving equity market on 27 different legal systems and 27 different ideas of supervision,” adds Boujnah.
The idea of trying to forge a more coherent European capital market is not new, however. Indeed, a decade after its launch, what was initially called the EU’s capital markets union (CMU) project remains a work in progress.
Strides have been made in areas such as prospectus reform and improving access to public markets for smaller companies, but Europe’s capital markets are still fragmented and under-developed while its companies remain overly reliant on bank funding. EU firms raise just a third as much financing from capital markets as their US counterparts, and investment flows across member states remain uneven.
“For 20 years European politicians have been discussing the need for better integrated capital markets, and frankly little has been achieved so far,” Polish finance minister Andrzej Domański lamented last month.
Sceptics say that even with reform in specific areas, it will be difficult to encourage a US-style equity culture in a continent where generous welfare and pension systems have removed much of the incentive for citizens to invest in riskier asset classes.
However, EU officials say there is greater political momentum behind the new effort because leaders have acknowledged just how damaging weaker capital markets are to Europe’s economy.
European Central Bank president Christine Lagarde estimates that there are €300bn annual capital flows from the EU to the US. Mario Draghi, a former ECB president and Italian premier, in a widely acclaimed report last year estimated annual EU investment needs in the order of €800bn, only a part of which would be covered by the public purse.
On some issues that are politically sensitive, officials say, there is a willingness to form smaller groups of countries that can push changes — rather than aiming for unanimity.
Some investors believe that momentum may finally be gathering, after years of false starts.
“This time is different, I believe,” says Vincent Mortier, group chief investment officer at Amundi, Europe’s largest asset manager with €2.2tn in assets under management. “The rebranding into ‘savings and investments union’ is not cosmetic, it is a meaningful change.”
Mortier says that CMU is needed “more than ever” to create an alternative to the US and to redirect savings towards productive investments in Europe. “What we hear from the European Commission and the European Central Bank is pretty reassuring. They get the urgency. But it is still a long way to converge with all stakeholders.”
For entrepreneurs such as Villig, the scale of the problems means Brussels has to move faster. “Unless this turns around, Europe doesn’t have an economic future,” he says. “Let’s be honest — if our best companies keep getting crushed or forced to move abroad, what’s left?”
The fragmentation of Europe’s system ranges from tax and regulations to insolvency.
Creditors of a small company that goes bust in Greece can on average expect to recover about 5 cents of every euro they are owed. In Luxembourg, they might recoup three-quarters of the debt, according to a 2023 European parliament briefing.
The gap is partly due to differences between countries in insolvency law, which sets out what happens to companies that can no longer meet their financial obligations.
“Insolvency rules are just like family law, [they’re] extremely entrenched in the fabric of each society,” says Boujnah. “Nevertheless, a proper insolvency law harmonisation could be a game-changer in the debt markets.”
The commission is considering targeted measures in non-bank insolvency law to provide greater legal certainty for investors. Although full convergence remains politically sensitive, officials suggest that a minimum standard approach could be feasible in key areas.
Insolvency is just one example of the lack of harmonisation across national frameworks within the EU. Others include inconsistent securities laws and differing tax treatments, both of which continue to deter cross-border investment and limit the scalability of EU capital markets.
Another structural obstacle is the sluggish pace of securitisation, or the practice of packaging financial assets, especially loans, into marketable securities. Once a vital tool for both companies and for investors, Europe’s securitisation market has struggled to recover since the financial crisis, held back in part by what market participants describe as overly complex and cautious regulation.
EU annual issuance of securitisation products stood at 0.3 per cent of GDP in 2022 — compared with 4 per cent in the US, where government-backed agencies such as Fannie Mae and Freddie Mac package up billions of dollars of home loans made by commercial banks into investment products.
Draghi called on Brussels to “adjust prudential requirements for securitised assets. Capital charges must be reduced for certain simple, transparent and standardised categories for which charges do not reflect actual risks.”
The commission has signalled a willingness to revisit the existing framework, aiming to allow more risk into the system, without compromising financial stability.
“Maybe the level of risk we have now in the economy is not the right one,” EU financial services commissioner Maria Luís Albuquerque acknowledges in an interview with the Financial Times, adding that “it is challenging to get to the right calibration”.
The question of enforcement also looms large. Market participants and EU officials alike increasingly view stronger central supervision as critical to reducing fragmentation. A growing number of voices, chief among them France, are calling for an overhaul of the European Securities and Markets Authority (Esma), proposing that it be granted direct supervisory powers over large cross-border entities and key trading platforms — much like the US Securities and Exchange Commission. At present, all enforcement is carried out by national regulators.
The commission has pledged to move to a single supervisor for certain entities such as large clearing houses, cryptocurrency exchanges and big cross-border asset managers.
Industry groups have welcomed the move, but given the tortured history of capital market reform many remain cautious about the potential for meaningful change.
Calls for more market integration often clash with national interests, particularly in states such as Ireland and Luxembourg, which have large asset management sectors. That has resulted in resistance to moving supervision to the EU level.
“That’s the part of the debate that I really think must shift,” says Albuquerque. “It’s about guaranteeing the right outcome for Europe.”
Europe’s leading banks believe that the capital markets project — and a parallel initiative to create an EU-wide banking system — is vital for their competitiveness.
“The European banks and capital markets need one framework and one set of rules across our markets to support our bloc’s competitiveness, encourage investment, and empower the EU to be more than the sum of our parts,” says Andrea Orcel, chief executive of Italy’s UniCredit.
If there is one country in Europe that offers inspiration for bureaucrats hoping to turn savings into investment, it is Sweden.
Generations have grown up in the Nordic country with exposure to equities via pensions and public messaging. Broad tax-advantaged accounts like the investeringssparkonto (ISK) have normalised investment in stocks and funds across all social strata, creating a culture of participation that has deepened liquidity and allowed even small firms to raise money locally.
“We say it’s saving, but really, it’s investing,” says Swedish finance minister Elisabeth Svantesson. “It’s deeply cultural. Everyone, from left to right, understands this. And it channels money into innovation and companies,” she adds. “That’s why our capital markets work.”
Adam Kostyál, president of Nasdaq Stockholm, agrees. “We have to start with households . . . If you don’t have a strong bottom layer of investors, you can’t build a healthy public market.”
Sweden also has large investment groups, such as Wallenberg and Kinnevik, that can supply the so-called patient capital needed to turn start-ups into bigger companies. The country has produced two of Europe’s highest-profile tech companies, in the shape of streaming platform Spotify and payments group Klarna.
Sweden’s success highlights not only what could be possible across the continent, but also how far many countries still have to go. Most Europeans are wary of stock markets, unsure how to invest or fearful of losing their savings.
The result is that while Europeans save 15 per cent of household income, more than three times what Americans manage, that is mostly held in low-risk products such as savings accounts. Between 2015 and 2021, EU households held 32 per cent of their financial assets in cash and deposits, compared with just 13 per cent for US households, who put almost half their financial wealth into equities and investment funds.
“It’s just sitting in completely the wrong asset classes, and it’s killing us,” says Villig.
The continent’s relatively generous publicly funded retirement and higher education systems also act as a disincentive. “If you want to retire in the US, you need to buy shares when you’re young,” Boujnah says. “In Europe, you hope someone else is still paying taxes when you’re old.”
Sceptics also point out that the project of creating an integrated capital market was difficult to achieve when the UK was in the EU, it could be even harder without the deep access to capital that the City of London enjoys.
EU officials acknowledge that completing the CMU will require sustained effort, member state co-operation and, at times, compromise.
The commission is exploring proposals that include enhancing financial literacy, introducing EU-wide investor labels and simplifying access to capital market products for retail investors. Officials argue that deeper retail participation is essential for market resilience and long-term financing of Europe’s green and digital transitions.
Some capitals, frustrated with drawn-out and often ineffective EU-wide efforts at integration, have suggested going deeper with fewer countries on certain aspects, such as the proposal for pan-European savings products, hoping that this will lead to a snowball effect.
“What we are going to see in the years to come is an acceleration of coalitions of the willing,” says Boujnah. Euronext is about to launch a pan-European equity prospectus in English, modelled on the S-1 registration form used by the SEC in the US. It is a move intended to lower the administrative burden and make IPOs more accessible across borders.
Christian Noyer, a former governor of the French central bank and author of a report on capital markets for the commission, argues that efforts like these are crucial, but insufficient. “If we can’t create a true single market for capital, we’ll continue to lose our best companies to places where raising funds is simply easier,” he tells the Financial Times.
Villig warns that the consequences of past inaction are already visible. “Look at AI — why isn’t Mistral a €100bn company today?” he asks, referencing Europe’s best-known AI company. “If you don’t have the right capital, you can’t compete. And it’s not just about money — it’s about the ecosystem, the talent, the valuations. These things compound.”
He adds that even when European start-ups do manage to go public, many opt to list abroad, as Spotify did in 2018 and Klarna is planning to. “No founder wants to go to the US. We’re not running away — we’re being pushed,” he says. “[CEOs] think they’d get better valuations, more liquidity, more support in the US. That’s a huge red flag.”
What both supporters and critics of the EU’s push agree on is that reversing the drift in Europe’s capital markets will require a multipronged response to long-standing structural weaknesses. Financial literacy remains uneven, limiting public participation in markets. Retail investors continue to face barriers to entry, while pension systems in many member states offer limited incentives for equity investment.
Regulatory regimes, shaped by a post-crisis focus on risk reduction, may need to be rejigged to support growth. Finally, politics remain the main obstacle to meaningful progress on harmonising the EU’s fragmented rule book.
“This isn’t just about start-ups,” Villig concludes. “It’s about Europe’s place in the world. If we can’t figure out how to invest in our own future, someone else will — and then they will own it, instead of us.”
