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Report – Building EU capital markets from the bottom up

March 2023 • The future of EU capital marketsby Maximilian Bierbaum

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Building bigger and better capital markets in Europe needs a combination of EU-wide ‘top down’ measures to encourage harmonisation and national-level ‘bottom up’ measures to increase capacity.  This report is the first in a new series and identifies the key building blocks for deeper pools of long-term capital in individual EU member states,  the starting point for deep and effective capital markets, with a focus on pensions.

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This paper is the first in a series of reports and events that identify the essential building blocks for developing strong capital markets at a national level, analyse how different countries have built successful capital markets in different sectors over the years, and assess the different steps and reforms being taken in different countries.

Deep capital markets provide a more diverse, flexible, and resilient source of funding for the wider economy, but capital markets are nothing without the ‘c’ – capital. This is why we are starting our ‘Building EU capital markets from the bottom up’ series with a focus on pools of long-term capital in the EU. They are the starting point for well developed capital markets, and they are a good example of an area of the capital markets that is entirely a national political and social issue.

One of the biggest challenges for capital markets in the EU is that there is not enough long-term capital in the form of pension and insurance assets. Behind the headline numbers, the real problem is not so much with long-term capital in general, but with pensions. Insurance assets, representing two-thirds of long-term capital in the EU, are comparable in scale to other developed economies. This is an important source of long-term capital, but the problem with insurance assets is that there are too many restrictions around the sort of projects they can be invested in.

The thing that can really move the dial is pensions, which in the EU are just a fraction the size of comparable economies. There are a number of economies in the EU with well developed pension systems and high levels of pension assets that can serve as a playbook for other countries to develop their capital markets, but we also recognise that pensions reform is a huge political challenge.

Here is a short summary of the report:

1.From the bottom up: building bigger, deeper, and more integrated capital markets in Europe requires a combination of EU-wide ‘top down’ measures to encourage harmonisation and, more importantly, national-level ‘bottom up’ measures to increase capacity. Bigger and better capital markets will not be built in Brussels but in each and every member state. It is a long-term game and will take decades to become a reality.

2. The ‘C in CMU’: deep pools of long-term capital such as pension and insurance assets are the starting point for deep and effective capital markets, but pools of capital in the EU are much smaller than in the US, UK, Canada, or Australia. Shifting more savings from bank deposits to investments would deploy more capital to help create jobs, fund innovation, and support wider economic growth in the EU.

3. The European pensions problem: the EU does not so much have a long-term capital problem as a pensions problem. Insurance assets in the EU are roughly comparable in size to other economies and account for nearly two-thirds of the long-term capital in the EU. The real problem is that pension assets – which face far fewer restrictions on what they can invest in – are tiny in the EU. Bigger pension assets could move the dial, but today they only represent 31% of EU GDP, a fraction of the scale in markets like Canada, Australia, or the UK.

4. The perfect example: pensions are a good example of what it means to build EU capital markets from the bottom up: the level of pension assets in any given EU member state is entirely a national political and social issue. There is nothing at an EU level to stop Italy, Spain, or Austria from developing the same sort of pension system and eventually having the same sort of scale of assets as the Netherlands, Denmark, or Sweden.

5. The poster children: it can be politically challenging for EU member states to try and take inspiration from the UK or US. The good thing is that they do not need to: there are plenty of examples of countries in the EU itself that have developed deeper pools of long-term capital. The Netherlands and Denmark together account for more than half of the EU’s total pension assets, but only 8% of EU GDP.

6.The role model: pension assets in the Netherlands are more than twice the size of Dutch GDP. Participation in occupational pension schemes is quasi-mandatory, contribution rates are adequately high, management fees are low, and they have a collective approach to risk-sharing. The cross-industry structure of the system means that Dutch pension funds are huge, which significantly increases efficiencies and lowers costs.

7.A lot of potential: relative to GDP, the size of funded pensions in the two largest EU economies – Germany and France – is only a fraction of those in the Netherlands and Denmark. Pension reforms are underway in both Germany and France, but they will likely not move the dial, and more significant changes will be needed.

8.Looking east: there are a number of high-potential markets in the east of Europe, but not all have identified capital markets development as an urgent issue. Poland, for example, has a dedicated capital markets development strategy, whereas recent reforms have left Hungary with an unfunded, pay-as-you-go one-pillar pension system that fully relies on the government budget’s ability to pay future retirement incomes.

9.Key building blocks: you cannot copy and paste a pension system from one country to another market, but there a few common essential building blocks that can make a difference such as starting reforms sooner rather than later; introducing mandatory funded pensions and auto-enrolment; offering good incentives; adopting a collective approach with efficient vehicles; and building political and public support for reform.

10.Tough decisions ahead: there is no silver bullet or magic wand that can create bigger and better capital markets in Europe out of thin air, and we would like to see more debate among national governments, finance ministries, and regulators about the sort of measures individual member states can and should take.


I would like to thank William Wright for his support and feedback and our members for supporting our work on bigger and better capital markets. Any errors are entirely my own.

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