Report: unlocking the growth potential in European capital markets
June 2019 • The future of EU capital markets • by Panagiotis Asimakopoulos & William Wright
This report outlines an ambitious vision of game-changing growth in European capital markets. It underlines the wide range in the size and depth of markets across the EU and highlights the potential benefits of deeper capital markets to the European economy in concrete and practical terms.
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The capital markets union initiative has laid some of the foundations for future growth, but in terms of concrete progress it has been relatively modest. One of the main factors behind this is the often lukewarm political commitment to – and continued mistrust of – bigger capital markets in many countries across Europe.
This report addresses this head-on by making a concrete and practical case for the benefits of bigger and better capital markets, breaking it down to a more accessible and tangible level.
Bigger capital markets are not an end in themselves. They help diversify the sources of funding for companies; reduce the reliance of the EU economy on bank lending; increase the availability and scale of risk capital to support innovation and growth; boost the pools of long-term capital that could be put to work in the economy; and help reduce the increasingly unsustainable burden of future pensions provision.
Making a tangible case
We have expressed the growth potential in terms of what it would mean for the number of additional companies in each sector and each country that could potentially access capital markets, and how much more money they would be able to raise. To pick one country, our model estimates that in Germany the realistic growth potential translates into an additional:
- €112,000 in pensions and insurance assets per household
- 85 companies a year raising €13bn in the IPO market
- 135 companies a year raising an extra €23bn a year in the corporate bond market
- 335 companies a year getting an extra €500m in venture capital
The report highlights the significant progress in capital markets in the EU over the past five years as markets have recovered from the financial crisis, and measures the wide range in the level of development of capital markets across the EU. It also forecasts where we might expect capital markets to be in 10 years based on some conservative growth assumptions based on current trends.
More importantly, it also presents a much more ambitious growth analysis based on a ‘what if…?’ scenario: what if capital markets in each country in the EU were as large relative to GDP as they are in the five most developed countries in each sector? While this growth may seem improbable from where we are standing today, it is based on what five member states in each sector have already shown is perfectly possible.
This growth – or even modest progress in the right direction – would have a significant impact on national economies across Europe. We think that with a renewed commitment from EU policymakers, national authorities, and market participants, significant growth is realistically achievable.
- Game-changing growth: there is huge potential for growth in capital markets across the EU27. On our ambitious but achievable analysis, an additional 4,000 companies in the EU27 could raise an extra €600bn per year in the capital markets – roughly double the current levels of activity. This growth – or significant progress towards it – would significantly reduce the reliance of the EU economy on bank lending, drive innovation, and boost investment in jobs and growth.
- A more sustainable future: alongside this growth in capital markets activity, our analysis shows the potential to transform the pools of long-term capital in the form of pensions and insurance assets that the EU needs to provide for a more sustainable future. An additional €16tn in long-term capital could be put to work in the EU27 economy – more than double the current levels – with the average value of long-term capital per household rising from €58,000 today to €143,000.
- Mind the gap: capital markets in the EU27 are relatively underdeveloped, and the departure of the largest and deepest capital market in Europe has highlighted the urgency of the capital markets union initiative. On average, capital markets across the EU27 are half as large relative to GDP as in the UK, which in turn is half as developed as the US.
- A wide range in depth: there is a wide range in the depth of capital markets across the EU. The good news is that there are a number of countries in the EU27, such as the Netherlands, Sweden and to a lesser extent France and Denmark with well-developed capital markets that can lead the way in terms of the future growth across the EU27.
- Playing catch-up: on the other hand, capital markets in large economies such as Germany, Italy and Spain are significantly underdeveloped, and there is a long tail of smaller countries – mainly the most recent member states – with relatively nascent but high potential capital markets.
- The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding. In the US the split between bank lending and corporate bonds is 26% and 74%. In the EU27, just 23% of corporate borrowing comes from the bond markets, exposing the economy to the sharp decline in bank lending since the financial crisis. On the plus side, the reliance on bank lending has fallen significantly in the past decade.
- Deeper pools of capital: deep pools of long-term capital such as pensions and insurance assets – as well as direct retail investment – are the starting point for deep and effective capital markets. But pensions assets in the EU27 are less than a third as big relative to GDP as in the UK. Households in the EU27 hold nearly a third of their assets in bank savings, nearly three times the level in the US.
- Fuelling the growth economy: the EU doesn’t have a start-up problem or an SME problem – but it does have a problem channelling investment into the sort of high growth and scale-up companies that drive job creation. On our growth analysis, nearly 2,000 additional companies a year could benefit from an additional €3bn a year in venture capital funding – roughly double the current levels – and the number of companies listed on growth stock markets could nearly triple.
- Laying the foundations: it is important to distinguish between what measures can be taken at an EU level and at a national level to help develop capital markets. At the EU-level (the ‘more union’ part of CMU), there needs to be a renewed commitment from EU and national authorities to reform the supervisory architecture and accelerate convergence to reduce cross-border barriers, enhance competition and improve transparency.
- Pulling the big levers: this top down approach can only go so far. We think a more fundamental, bottom up approach (the ‘more capital markets’ part of CMU) is needed and could have a much bigger impact. Ultimately bigger and better capital markets in Europe can only be achieved if national governments recognise the potential benefits to their economy of deeper capital markets, and pull the big levers around pensions reform and tax policy to help them grow.
The full report includes:
- An ‘at a glance’ summary of the growth potential in different sectors of the capital markets in the EU27
- A country summary of the highest impact sectors in terms of growth
- A summary of the main benefits of deeper capital markets to the economy
- Analysis of the wide range in the depth of capital markets in each country across the EU
- A ranking of individual countries by the overall depth of their capital markets with a simple traffic light indicator, along with the depth of key sectors of the capital markets in each country
- Analysis of the size of capital markets in each country
- Analysis of level of the stock and flow of bank lending to companies in the EU over the past decade
- Analysis of the changing balance between bank lending and corporate borrowing in the EU and in key countries over the past decade
- Analysis of how households in the EU and in key countries invest their financial assets and how large those assets are
- The growth potential in pools of capital (pensions and insurance) expressed in thousands of euros per household across the EU27 and in key countries
- The growth potential in the IPO market across the EU27 and in key countries, expressed in terms of how many more companies would raise how much more money
- The growth potential in the corporate market across the EU27 and in key countries, expressed in terms of how many more companies would raise how much more money
- The growth potential in the venture capital across the EU27 and in key countries, expressed in terms of how many more companies would receive how much more backing
- The growth potential in SME / growth stockmarket across the EU27 and in key countries, expressed in terms of how many more growth companies could be listed
- A summary of some key measures that policymakers at a European and national level can take to deliver this sort of game-changing growth
- A full methodology
- Links to five of our previous reports on capital markets in the EU