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EU capital markets: a new call to action

by Christopher Breen, Maximilian Bierbaum, and William Wright

September 2023

EU capital markets

Analysis of the size and depth of capital markets in Europe in the context of some of the biggest social and economic challenges.

Member states, EU authorities, and the European banking and finance industry need to inject more urgency across Europe into building bigger and better capital markets. This report identifies five of the biggest social and economic challenges facing the EU, analyses whether EU capital markets are in a position to address these challenges, and outlines a small number of high-priority steps to accelerate capital markets development.

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At New Financial we have been making the case for bigger and better capital markets in Europe for nearly a decade. This annual benchmarking report on the size and depth of EU capital markets - published in partnership with Deutsche Bank - helps us track progress. The good news is that we can measure some welcome developments: capital markets in the EU are bigger and deeper than they were ever before. The not-so-good news is that they are still not as developed as they could or should be.

This year our report focuses on three simple but vital questions:

After many years of talking, drawing up strategies, and developing action plans, Europe now needs to step up its game. It is high time for individual member states, EU authorities, and the wider European banking and finance industry to inject more urgency across Europe into building bigger and better capital markets. Member states in particular need to start taking some of the tough decisions required to develop their own capital markets and to build capacity from the bottom up.

The potential benefits are huge: more developed capital markets in Europe could increase the financial wellbeing and security of millions of EU citizens now and in the future; finance the sort of innovation, growth, and high potential companies that Europe needs; help finance the transition to net zero; and help the EU play a bigger and more impactful role on the global stage.

On the flipside, there would be dire consequences if Europe does not get its house in order and further delays building bigger and capital markets.

The first part of the report first discusses how capital markets can help the EU to address some of the biggest challenges it is facing. The second section includes our annual benchmark of EU capital markets and measures their size and depth in 2022. We then analyse what has (and has not) changed in EU capital markets and provide a call to action to decision makers at all levels to help them develop capital markets at a national and at an EU level.

1) A new call to action: the EU economy needs all the help it can get in the wake of Covid, Russia’s invasion of Ukraine, the energy crisis, global economic slowdown, rising interest rates, and stagnating growth. Building bigger, deeper, and more integrated capital markets in Europe is more urgent than ever.

2) Five big challenges: in the coming decades the EU will need to i) successfully transition to net zero ii) better support innovation and growth iii) give companies better access to more sources of funding iv) support an ageing population v) secure and advance its role on the global stage. These challenges are complex but present a once-in-a-generation opportunity to transform the lives of millions of EU citizens.

3) Not quite there yet: more developed capital markets are not the obvious answer to all of the challenges the EU is facing, but the EU will not be able to address its biggest challenges without them. To develop European capital markets, member states, EU authorities, and the wider banking and finance industry should focus more on ‘capital markets’ than ‘capital markets union’; more on outcomes than legislative initiatives; and more on what individual member states can and should do themselves than on EU-wide solutions.

4) Bigger and deeper: EU capital markets have rapidly grown in the past few years. Relative to GDP they have grown by nearly 50% since 2014 and are deeper than ever - but they are still not as developed as they could or should be. In the face of economic headwinds it will be challenging to maintain this growth.

5) An uneven picture: every year this report measures the depth of EU capital markets in different sectors of capital markets activity in all EU member states, and every year we see a huge range in depth that shows little sign of narrowing. The range in depth of capital markets across the EU is far greater than the difference in depth between the EU and the US, or the EU and the UK, and is one of the reasons why harmonising EU capital markets is necessary but challenging.

6) A concentrated market: after Brexit, France and Germany have become the largest and second largest (or vice versa) EU markets in 13 out of 21 capital markets sectors in terms of value. Given the size of the two economies, this is unsurprising and demonstrates the potential if France and Germany get serious about developing their capital markets and building further capacity.

7) A focus on Sweden: in many respects, Sweden is the poster child for EU capital markets. For the first time since we started working on this annual report, capital markets in Sweden are deeper than they are in the UK. Over the past few years, the depth of capital markets has grown much faster in Sweden than in the rest of the EU. This growth has been driven by venture capital and private equity activity as well as strong equity markets.

8) The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding despite some progress over the past decade. In the face of economic headwinds, structural challenges, and regulatory reform, banks will be unable to provide the necessary funding for European companies on their own.

9) Capital markets without capital? Deep pools of long-term capital such as pensions, insurance assets, and direct retail investment are the starting point for deep and effective capital markets. But pensions assets in the EU are much smaller than in comparable markets and concentrated in just three EU economies. Shifting more savings from bank deposits to investments would deploy more capital to support the economy, jobs, and growth.

10) A burning platform: it is time to inject more urgency across Europe into building bigger and better capital markets and there would be dire consequences if Europe does not do so - lower financial security and wellbeing for millions of EU citizens, a smaller economy, a slower transition to net zero, and a smaller Europe on the global stage.

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