Europe’s financial markets are currently facing several challenges that are impacting their competitiveness on the global stage. According to a report by the Association for Financial Markets in Europe (AFME), European corporates’ share of global initial public offerings (IPOs) has significantly declined in recent years. Before the creation of the European Single Market, European corporates accounted for 5 percent of global IPOs.
However, this figure has now plummeted to around 7 percent. This decline raises concerns about the EU’s ability to attract public listings and scale up businesses to maintain competitiveness.
In addition to the decline in IPOs, Europe’s share of global market capitalization is also relatively low. While the EU’s share of global gross domestic product (GDP) is around 17 percent, its share of the world’s total market capitalization currently stands at only 13 percent.
Furthermore, capital markets’ funding of EU corporates remains at around 10 percent, a significantly lower level compared to the United Kingdom and the United States, where market-based financing averages 26 percent. These figures highlight the need for Europe to enhance its capital markets to attract capital and ensure economic growth.
Strategies for Scaling Capital Markets
To address these challenges, a coordinated effort is required at both EU-wide and domestic levels. European leaders must work together to align domestic approaches within a structured and coordinated EU-wide framework. This approach is essential to achieve the scale necessary to attract capital and finance economic needs across the EU. Explaining and promoting the benefits of integrated markets within Member States is imperative to foster growth and competitiveness.
One strategic move to scale capital markets is to focus on the development of liquidity in the EU equities market. Robust secondary-market liquidity is integral to fostering growth within the EU. Implementing certain measures outlined in the Capital Markets Union (CMU) Action Plan, such as establishing a European Single Access Point (ESAP) and consolidated tapes for shares and bonds, can help overcome the existing geographical fragmentation of EU markets. These initiatives aim to provide investors with centralized data access, improving market dynamics and encouraging EU listings.
Addressing Barriers to Market Growth
Several barriers need to be addressed to remove impediments to capital-market growth in Europe. One key issue is the withholding taxes and corporate-insolvency harmonization. Member States need to agree on proposals that simplify these regulations to facilitate cross-border investment and make equity funding more attractive. Moreover, harmonizing civil liability regarding prospectuses, particularly regarding forward-looking information, can enhance transparency for investors and provide greater clarity to issuers and their advisors.
Furthermore, leveraging emerging technologies such as distributed ledger technology (DLT) can enhance competitiveness and efficiency. The adoption of DLT can streamline trading and post-trade processes, reducing operational costs and improving liquidity.
In addition, securitization can be used to bridge the gap between traditional banking and market funding mechanisms. By transferring risk from banks’ balance sheets, securitization frees up capital for additional lending. However, the EU lags in this area compared to the United States. Recalibrating prudential treatments, reviewing disclosure frameworks, and supporting the nascent environmental, social, and governance (ESG) securitization market are essential to foster securitization in Europe.
Paving the Path to Competitiveness
Europe is at a turning point, and a fresh approach to its policies on capital markets is crucial. The declining number of IPOs and Europe’s relatively low global market capitalization highlight the urgent need for change. As the EU enters a new phase with the upcoming elections, a comprehensive and ambitious policy agenda is needed to ensure the competitiveness and resilience of the European economy.
Achieving this requires a joint effort, with coordinated EU and domestic-level initiatives. By working together, Europe can achieve the scale and integration of capital markets necessary to position itself competitively on the global stage. Strategic actions, structured coordination, and a commitment to change will pave the way for a resilient, vibrant, and globally competitive European economy.
Overall, Europe’s financial markets face challenges but also present opportunities for growth and development. By addressing barriers, implementing the CMU Action Plan, and leveraging emerging technologies, Europe can build resilient and competitive capital markets that attract investment and support economic growth.
