Searching for growth: the future of EU capital markets

While the development of capital markets has become a political priority in the EU, European capital markets are running out of steam. This report analyses how EU capital markets are (and aren’t) supporting the European economy, measures the size, growth and depth of EU capital markets 10 years after the launch of capital markets union - and outlines a plan for more focused concrete action and progress in the next 10 years.

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A decade after the EU launched capital markets union, EU capital markets seem to be running out of steam - just when Europe needs them more than ever. The good news is that the EU’s capital markets are bigger and deeper than they were in 2014. The bad news is that this progress has been propped up by outsize growth in just a few select sectors and member states. In many key sectors and in some of the EU’s largest economies, things are standing still or going backwards. Without more focused and more concrete action, EU capital markets will struggle to grow further.

10 years ago, in his first speech to the European Parliament, then-president of the European Commission Jean-Claude Juncker for the first time introduced the idea of a ‘capital markets union’ (CMU): a strategy for the EU to develop deeper, more efficient, and more liquid capital markets. Coincidentally, New Financial launched a few months earlier and has been making the case for bigger and better capital markets in Europe ever since.

Capital markets can bring many benefits to the European economy and citizens in terms of investment, jobs, and growth. They play a vital role in supporting and growing the European economy and have a direct impact on the EU’s competitiveness. Without more active and more dynamic capital markets, securing the EU’s competitiveness will be very difficult.

We think the recent surge in the political commitment to developing capital markets in the EU is a reason for optimism. The European Commission’s new term is a good opportunity to pause, reflect on the progress that has (and hasn’t) been made, and restart CMU. At the same time, we have a feeling that the development of bigger and better capital markets in Europe will keep us at New Financial busy for at least another 10 years.

The first part of this report discusses the benefits of capital markets in the context of economic growth and Europe’s competitiveness. The second section includes our annual benchmark of the size and depth of EU capital markets and provides a reality check on 10 years of CMU. We then take a closer look at where EU capital markets are today and outline a plan for more concrete action and more substantial progress in the next 10 years.

Here is a short summary of the report:

1. The benefits of capital markets: bigger and deeper capital markets can bring many benefits to the European economy and citizens in terms of investment, jobs, and economic growth. They play a vital role in supporting and growing the European economy. Without more active and more dynamic capital markets, securing and improving the EU’s international competitiveness will be very difficult.

   
   

2. Running out of steam: 10 years after the launch of CMU, EU capital markets are standing still or going backwards in many key sectors and in some of the EU’s largest economies. EU capital markets overall are deeper than they were in 2014, but the progress has been propped up by an outsize growth in just a few select sectors (such as venture capital investment) and member states (such as Sweden).

   
   

3. Taking stock: at its core, the outcome of an effective and successful capital markets development strategy would be an increase in early-stage investment, more IPOs, bigger stock markets, and a marked shift in the financing of companies from bank lending to corporate bonds. But outside of early-stage investment activity, the EU and member states have made little to no progress in many key sectors in the last decade.

   
   

4. The next 10 years: after a decade of not enough progress, capital markets in Europe and CMU not only need more engagement from individual member states from the bottom up but also a political reset with a more focused plan at the EU level to re-engage EU institutions and national governments.

   
   

5. A reason for optimism? The good news is that the recent political focus on how capital markets can help support the European economy and drive its competitiveness as well as the European Commission’s new term can help inject more urgency into building bigger and better capital markets in the EU.

   
   

6. A standout sector: the overall growth in the depth of EU capital markets disguises the fact that this growth is driven by an increase in activity in just a few sectors. The increase in venture capital (VC) activity is responsible for nearly two-thirds of all growth in the depth of EU capital markets in our analysis of 25 sectors of capital markets activity. 

   
   

7. A standout market: Sweden remains the standout market. A large increase in VC activity and active equity markets have fuelled growth in the depth of Swedish capital markets of nearly five times the average growth rate in the EU. Despite accounting for only around 3% of EU GDP, Sweden’s growth was responsible for 10% of the overall growth of EU capital markets in our model.

   
   

8. Going backwards: at the same time, capital markets activity across the EU in key areas such as equity and bond markets and in a few key member states like Spain, Ireland, or Poland have stood still or gone backwards. One of the key aims of CMU is to diversify the financing options for companies in the EU – but this is happening too slowly or not happening at all.

   
   

9. The competitiveness of the EU: capital markets in the EU are not keeping up with other economies in financing and supporting their own economy. In almost all sectors of the capital markets, the EU’s market share of global activity has declined in recent years. There is not enough long-term capital to meet the investment needs of the EU, and EU capital markets are not really catching up with the US or UK.

   
   

10. A renewed commitment: this report does not outline a detailed policy agenda in individual sectors of activity. Instead, it paints a vision of how the EU and member states can work together to deliver concrete change: from the top down, the EU focusing on a small number of focused, high-impact, and achievable initiatives (while avoiding blind alleys). And from the bottom up, more member states taking more responsibility for developing their own capital markets at a national level.