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Report: The future of EU capital markets

September 2021 • The future of EU capital marketsby Panagiotis Asimakopoulos, Eivind Friis Hamre and William Wright

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Analysis of the size, depth and growth potential of EU capital markets through the lens of Brexit and strategic autonomy.

This report analyses EU capital markets from the perspective of strategic autonomy. It shows that in most areas of activity the EU falls short and there is a lot of work to be done. Building bigger, better and more integrated capital markets needs to be an urgent strategic priority to develop sufficient domestic capacity to finance the EU economy and support a post-Covid recovery, reduce the EU’s reliance on third countries, and increase its international attractiveness and global influence.

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This is our eighth annual report on European capital markets, and this year it focuses on the future of EU capital markets through the lens of ‘strategic autonomy’. One of the big shifts in EU policy in recent years has been the emergence of ‘strategic autonomy’ as a central theme and a broader policy objective. Initially ‘strategic autonomy’ emerged in defence and foreign policy and it was about boosting the ability of the EU to defend itself and enhancing its military capabilities without reliance on others.

Since the Brexit referendum, the concept of strategic autonomy has become a key objective in EU financial policy and in various forms it will shape the future direction of European banking, finance and capital markets.

At its most basic level, strategic autonomy is about whether the EU has the sort of capital markets that it needs to support its economy and help drive a post-Covid recovery. This report analyses four inter-related aspects of strategic autonomy that we think are relevant to capital markets: i) the extent to which the EU is reliant on third countries for the provision of key activities ii) whether the EU has the necessary domestic and regional capacity in capital markets to fully support the wider economy; iii) how attractive EU markets are for international activity; and iv) whether the EU has an appropriate voice and influence in banking and finance on the global stage.

More broadly, we think strategic autonomy is about choices and options: do companies, investors, individuals and intermediaries have an appropriate choice about how and where they raise capital, what they choose to invest in, how they choose to save for their retirement, and where they choose to conduct their business? And does the EU itself have a full range of choices and options when it comes to finance and capital markets?

Closing the gap

The report highlights that on our definitions and the EU’s own definition, in most sectors of activity there is still a long way to go to achieve ‘strategic autonomy’ in EU banking, finance and capital markets. In certain sectors of financial activity the EU27 is over-reliant on the City of London. EU capital markets are not as attractive as they could be to companies and investors from around the world. EU capital markets are significantly smaller as a result of Brexit and are punching below their weight on the global stage.

And while significant progress has been made over the past five years, (with the exception of a handful of countries and a handful of sectors) EU capital markets do not yet have sufficient domestic capacity to fully support the EU economy and the prosperity of EU citizens. The report also provides a short analysis of the growth potential in EU capital markets and provides some policy recommendations that will help achieve growth in EU capital markets and underpin strategic autonomy. With renewed political commitment across the EU, and a judicious, open and pragmatic approach to regulation, there is no reason why the EU should not develop strategic autonomy in the coming years.

We hope that this report will help underline to policymakers across the EU27 the urgency of developing bigger, better and more integrated capital markets, while also outline the risks of pursuing strategic autonomy as an end in itself. The report highlights the huge growth potential in EU capital markets, which would have a significant positive impact on national economies across Europe, play a vital role in fuelling a post-Covid sustainable recovery, while helping the EU to reduce reliance to third countries, boost its international attractiveness, improve its global position and increase its influence on the global stage.

Here is a short summary of this report:

1. Fit for purpose: there are four main elements of ‘strategic autonomy’ in EU capital markets: the level of reliance on third countries, the EU’s level of domestic capacity, its international attractiveness, and the EU’s standing on the global stage. While EU capital markets have made significant progress over the past few years, on each of these measures the EU falls a long way short of having ‘strategic autonomy’ and has a lot more work to do.

2. The reliance on third countries: the EU is heavily reliant on the UK in several critical areas such as derivatives and FX trading, clearing, and asset management. This reflects the historic role of the City of London acting as the main financial hub serving the EU. Reducing this reliance will involve a delicate balance of requiring business to be located in the EU (as it has happened with equity trading) and encouraging it to develop organically.

3. International attractiveness: the EU is an overwhelmingly domestic capital market in most sectors and is not yet widely seen as an attractive international financial centre to foreign companies and investors. For example, foreign IPOs account for less than 1% of total IPOs in the EU27 (compared with a third in the UK) and non-EU banks represent just 5% of total bank assets.. The EU performs better in corporate bonds issued in euros by foreign companies (35% of all euro-denominated issuance) and in foreign ESG corporate bond issuance.

4. A smaller global footprint: Brexit has significantly reduced the EU’s global footprint in capital markets and could undermine its longer-term influence on the global stage. The EU’s share of global activity has fallen from 22% before Brexit ( the second largest block and around half the size of the US) to just 14%. In the longer term, without urgent reform, the EU’s share will shrink to around 10%.

5. Mind the gap: post-Brexit capital markets in the EU27 are smaller and relatively underdeveloped. This limits the sources of funding for companies and the opportunities for investors. On average, capital markets across the EU27 are half as large relative to GDP as in the UK, which in turn is roughly half as developed as the US. In their current form, EU capital markets will struggle to fuel a post-Covid economic recovery.

6. 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, Denmark and France with well-developed capital markets that can lead the way in terms of the future growth across the EU27. On the other hand, capital markets in large economies such as Germany, Italy and Spain are significantly underdeveloped and could play a much bigger role in building sufficient domestic capacity.

7. The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding despite some progress over the past decade. In the US, companies use corporate bonds for three quarters of their borrowing, three times more than level in the EU27. Banks will be unable to provide the necessary funding for European companies on their own post-Covid and in future crisis.

8. 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 a third as big relative to GDP as in the UK. Shifting more savings from bank deposits to investments would deploy more patient capital to help drive a more sustainable recovery in the longer term.

9. Game-changing growth: there is huge potential for growth in capital markets across the EU27: an additional 4,500 companies could raise an extra €500bn per year in capital markets, roughly double today’s levels, and an additional €12.5tn in long-term capital could be put to work in the economy. Progress towards this growth would significantly reduce the reliance of the EU economy on banks, boost growth, innovation, and jobs, and provide a more sustainable future for EU citizens.

10. Laying the foundations: EU policymakers and regulators should focus on: a) redefining the framework to improve supervision, monitoring and accountability b) building deeper pools of capital and boosting retail participation c) improving market infrastructure and the functioning of markets d) gaining political support and building capital markets from the bottom up, and e) increasing attractiveness, competitiveness and international cooperation.


I would like to thank Eivind Friis Hamre for his valuable contribution to data collection and analysis, William Wright for his support and feedback, Dealogic for providing access to much of the data, and our members for supporting our work on bigger and better capital markets. Any errors are entirely my own.

Panagiotis Asimakopolous – head of research, New Financial

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