Europe’s €10 trillion gamble

Pensions are an obvious target too. 

There are a few exceptions like the Netherlands and Sweden, but in much of Europe, pensions are paid by the government, and financed through taxation. By contrast, the U.S. has its 401(k) — a tax-incentivized private account that invests the money and pays out once people retire. 

“If you really want to boost the European economy and provide stable funding and long-term funding, looking to pension savings is a very obvious choice,” said Michiel Horck, senior counsel at PGGM Investments, a Dutch pension management firm that manages €243 billion worth of assets. 

The differences show up in the statistics. In the U.S., almost 60 percent of households own stocks, directly or indirectly through their pensions. In France that number is about 18 percent, with similar figures in Germany.

The value of all companies on Europe’s stock markets, as a percentage of GDP, is half of that in the U.S. according to a Commission report.

And venture capital in Europe — which makes bets on early-stage companies in the technology sector and is regarded as a magic ingredient that makes America so attractive for startups — is 1/20 the size of that of the U.S.

What’s a capital market?

A munitions factory, a wind farm and an artificial intelligence startup are all very different. But they do have one thing in common: They need money to get up and running.

That’s where capital markets come in.

A capital market is any place investors trade sources of financing. The most obvious example is a stock exchange, where company shares are bought and sold, but there are also similar markets for company or government debt, known as bonds.

Ideally, the capital markets union would link up what are now 27 different markets across the EU, letting investments spill across borders, and in the process attract more capital from savers to help finance European industry and help it compete with overseas rivals. 

It’s not that the money isn’t there, said Mathieu Savary, chief strategist at BCA Research, a financial research firm. But “Europe has fragmented capital markets … which makes it more expensive for businesses to raise funds.”  At the moment, around €300 billion worth of European savings are invested abroad every year, mainly in the U.S.

As Europe’s economic doldrums start to look more like a permanent state, some things are starting to shift. EU heads of government agreed in April to “relaunch” the European market for resold debt known as securitization, which for a long time had been politically toxic in Europe because of its role in the 2007-2008 financial crisis. Finance ministers also agreed in May to work on "deepening" national capital markets ― increasing attractive investment opportunities ― which wouldn’t require EU-level lawmaking.

There’s a feeling it’s an idea whose time has come. On the margins of a meeting of EU finance ministers in July, Germany’s Christian Lindner scowled when fielding questions about France’s enormous debt ― but practically beamed when POLITICO asked about the capital markets union. 

It’s “one of our top priorities,” he said. “This is much more important than always considering further public debt.  

And amid an at-times difficult relationship between the EU’s most powerful governments, it’s one subject where Paris and Berlin see eye to eye. 

The Germans like it because it might avoid the need for more joint EU borrowing of the kind that was done during the pandemic, which they hate.

In France, the project is one more step toward making the EU less reliant on the U.S. Private capital could help Europe reorientate itself in areas like energy and defense. That it could also help wean European savers off of American investments is an added bonus.  

“The rules of the game in Europe today are no longer adequate because if we look at defense and security, artificial intelligence, the decarbonization of our economies and clean tech, we have a wall of investment," said President Macron in his speech entitled "Europe — it can die.”

The size of the venture capital market in Europe is a fraction of that of the U.S. That constrains access to money for the kind of innovative start-ups that policymakers want to encourage in Europe.

Totally stuck

Getting this done isn’t easy. Standardizing bankruptcy laws, a major plank of the project, has been totally stuck. This is critical because when creditors decide whether or not to help finance a project, they want the safety of knowing what will happen if it goes belly-up. 

Another key idea is the creation of a single EU supervisor for "nonbank" financial organizations, such as stock exchanges and asset managers. This would allow them to follow the same rules across the bloc when they operate cross-border but many capitals aren’t in favor. The most likely candidate for the future EU supervisor would be the Paris-headquartered European Securities and Markets Authority (ESMA) — but rival capitals worry that it would be winner-takes-all, with major firms relocating to France to be close to their supervisor.

Then there’s the fact that there would be losers in any concerted effort to create a single market for finance. At the moment, many financial institutions — banks, insurers, exchanges and the like — benefit from being a big fish in a small pond. Under the capital markets union they would be exposed to competition from across Europe. Some of them wouldn’t make it, either going bankrupt or getting bought out by rivals.

“Very few countries are confident that their national champions would survive contact with actual competition,” said Bryan Coughlan, sustainable finance officer at the European Consumer Organisation. “Everybody always says that they want open markets and competition and so forth but that’s not what happens in the actual policy settings.” 

Getting it to work

Even if the capital markets union were to be completed, it might not be the silver bullet Europe is hoping for. How much funding it would unlock remains open to debate. Thierry Philipponnat, chief economist at Finance Watch, an NGO, fears some of the more optimistic outcomes are "wishful thinking".
"Look, do it, but don’t dream it’s going to finance unprofitable projects or projects without sufficient yields," he said. "It will never be the case. And a lot of what we have to do today, in particular to combat climate change, is of that nature."

US WINNING THE HIGH-TECH BATTLE

Long a source of frustration for EU policymakers, U.S. businesses dominate the high-tech landscape. Going by their market value, over half the top 500 largest companies are American. 

Nationality of largest high-tech firms by market capitalization, as a share of the number of largest companies.

In a recent report, Finance Watch found that even in the best-case scenario, where the capital markets union is completed, private financing could only meet one-third of the EU’s green transition needs. The rest would have to come from the public purse. 

While it still remains on the drawing board, the risk is the capital markets union lets politicians skirt difficult political decisions on how to raise more public money — whether through borrowing at a national or EU level, raising taxes or cutting spending — and avoid funding the bloc’s basic research, defense and energy priorities. 

Still, even if it’s a pipe dream, it might be the best they’ve got.

Boujnah, the Euronext CEO, is enthusiastic about its prospects now that leaders are finally grabbing the bull by the horns.

“When there is a political will, Europeans can be extremely fast," he said.

They need to be.

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