The fragmentation of European markets continues to be a burden for channel savings into essential investments that support the growth of the euro zone. In a turbulent scenario with growing geopolitical tensions, the double challenge of the green and digital transition requires that Europe does not lag behind in innovation compared to the United States and China, and that it is able to take full advantage of the potential of its business engine. But without a massive investor base and proper channeling of savings, a deep capital market cannot emerge.
The need to make savings profitable involves the creation of “labeled national products” that encourage long-term investments within the euro zone itself. A strategy that, if widely deployed, would channel around 200,000 million euros in European marketsaccording to a study prepared by the French Ministry of Economy focused on the development of the EU capital markets union (CMU).
The European Union has one of the highest savings rates in the world13.3%, surpassing the United States by more than five points, according to data collected by the Bank of France at the end of 2022. Specifically, the financial savings of EU households amounted to 35,533 million euros in 2022, almost double the region’s GDP. Two thirds of this amount were concentrated in five Member States: Germany, France, Italy, the Netherlands and Spain.
However, savings are poorly distributed. About 20% of euro zone residents’ money reserves are invested in debt securities issued elsewhere in the world, the analysis indicated. “There is a lack of investment opportunities in Europe, so we look for them outside. European investments are no longer as competitive as in the United States or Japan,” said Massimo Cermelli, professor at Deusto Business School, who also stressed the need to simplify the regulation like the United States, where investments are “more juicy.”
Overregulation
Just think that Europe has 28 central securities depositories, those organizations that hold financial securities in custody to facilitate property exchanges. On the other hand, the United States only has one. A fragmentation that “directly affects the transaction costs borne by European investors,” warns the study commissioned by the former French Minister of Economy, Bruno Le Maire. “The US has always been a magnet for investment and savings. lack of competitiveness and excess regulation They are an obstacle for the CMU,” added Cermelli. The challenge is clear: to avoid a drain on both the public and private sectors.
Added to the low attraction of investment within the euro zone is the low risk predisposition. Bank deposits, savings accounts and guaranteed or liquid life insurance funds represent almost half of the financial assets of European households, taking away the importance of riskier but more profitable long-term asset investments.
Now, some countries offer long-term savings products such as the PER and the PEA in France, which allow investing in French or international companies; the complementary company pension plan Betriebsrente from Germany; or the individual long-term savings plan (PIR) in Italy. And in the wake of the failure of the pan-European personal pension product (PEPP), the committee of technicians convened by Le Maire recommends opting for a decentralized approach “based on a label” that involves a attractive tax regime legitimized by a predominant allocation in European assets (for example, 80% or more).
A more varied menu. That would be the key to making the European market more accessible and competitive, said Francisco Uria, global head of banking at KPMG. “We must increase the diversification of the products offered to investors so that savings can become an investment that contributes to financing the European economy,” he added.
Ending capital fragmentation seems like a priority of both the European Commission and the ECB. The president of the community Executive, Ursula von der Leyen, highlighted it among her most ambitious objectives of her second term. And Christine Lagarde, president of the ECB, put the issue on the table several times. “Capital markets are the missing link for Europeans to convert their high savings into greater wealth,” he said last week, recalling that this will allow them to spend more and strengthen domestic demand. Of course, he acknowledged that it is a pending issue, regretting that “this growing urgency has not been accompanied by tangible progress towards the CMU.”
Close the gap with the United States
Europe can no longer postpone the design of the integration of its capital markets in the face of its enormous financing needs. From now to 2030, will have to invest each year around a billion more euros to address the challenges of the ecological and digital transition, in addition to strengthening its defense industry. These injections of money become even more necessary for the Old Continent to wake up from its lethargy and try to close the growing economic gap with the United States.
The Letta report makes it clear: US GDP per capita grew by 60% between 1993 and 2022; that of the EU, less than 30%. And the outlook for this year is not encouraging. The International Monetary Fund estimates growth of 2.8% for the United States, while expansion in the eurozone would remain at 0.8%.
The capital markets union, announced in 2015, aims to remove bureaucratic obstacles between the different EU States to give companies more opportunities to raise funds. Economists at Capital Economics point to three big advantages of CMU. “First, a larger equity market would make it easier for companies to achieve economies of scale. Furthermore, it could increase the sources of financing available to SMEs. Finally, the creation of a large and liquid bond market in the EU can favor the development of the corporate bond market, which would also facilitate access to financing,” they indicate.
Institutional agendas emphasize the urgency of integrating capital markets in the EU, as the Draghi report demonstrates. However, progress remains slow. Capital Economics warns that it is impossible to quantify the potential benefits of CMU to Gross Domestic Product and is skeptical that deeper capital markets in Europe will be enough to persuade households to invest the same proportion of their money. wealth in risk assets than in the US. “Although the CMU can facilitate investment in Europe, it would take a long time to have a significant macroeconomic impactgiven that the US markets are much larger and more liquid,” they say.
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