Draghi’s Capital Markets Report, one year on: A false dawn or a turning point for Europe?

It’s been a year since Mario Draghi published his report on competitiveness in the European Union (EU), and opinions still diverge on whether or not Europe can transform its partly dormant financial resources into accelerated growth and productivity. The EU has dedicated decades to the creation of its Internal Market. It has laid the groundwork for bringing down remaining barriers that would allow the European economy to thrive without compromising on its values, social model and environmental objectives. But formidable hurdles remain in place.

The missing link here is capital markets.

According to the Draghi report, EU household savings in 2022 were 1.39 trillion euros, compared with 840 billion euros in the US, while financial securities directly held by households account for 43 % of US household wealth but only 17 % in the EU. It is estimated that as much as 8 trillion euros, or 350 billion euros annually, could be shifted towards market-based investment instruments if EU households adjust their allocation between deposits and financial assets.

In recent years, 147 European “unicorns” start-ups went on to be valued at or above 1 billion US dollars. However, 40 of these relocated their headquarters abroad. Others turn to capital markets abroad to secure financing.

One example is Klarna, the fintech group from Sweden which very recently listed in the US. Klarna’s founder, Sebastian Siemiątkowski, explained in an interview with Semafor: “Building a global business from Stockholm has been hard.

“We grew very successfully, but in a very small market, so the success in Sweden could never support the success in Germany. And the success in Germany could never support the success in the UK. And the UK couldn’t support the US.”

EU institutions are now preparing new proposals for legislation to bring down barriers. They do not have to look across the Atlantic Ocean to find inspiration – their own member states provide examples of capital markets of varying size, depth and liquidity.

Sweden has developed one of the most efficient capital markets in the EU, providing a prototype for how long-term savings, entrepreneurial dynamism and regulatory planning can create economic growth and capital formation. The Centre for European Policy Studies (CEPS) highlights these strengths in a recent report: “While Sweden’s economy is relatively small, its capital markets are deep, liquid and resilient, outperforming much larger Member States in areas such as IPO activity, equity market capitalization and household investment participation.”

Christine Lagarde, the European Central Bank chief, emphasised in an October speech the importance of creating a true EU market for capital. She pointed to a study estimating that if European countries meet their solar and wind targets, electricity prices could fall by more than a quarter by 2030. She added that the financing needs for the green transition are estimated at 1.2 trillion euros per year and that the private sector will have to provide over two thirds of that.

Opinions still diverge on whether or not Europe can transform its partly dormant financial resources into accelerated growth and productivity.

Lagarde stated: “...even though Europe has ample private savings, current financing arrangements are not channelling supply towards demand. Nearly four in ten European firms see the lack of investor willingness to finance green investment as a very significant obstacle. The missing link here is capital markets.”

The EU initially launched a program to create a Capital Markets Union (CMU) a decade ago. Progress was limited at the time, but Brexit and today’s rapidly changing global geopolitical landscape have created a new sense of urgency for the project.

For the EU to make real progress, it needs active support from its member states. Importantly, in October German Chancellor Friedrich Merz called for the establishment of a single European stock exchange, signalling German support for plans to unify the bloc’s capital markets.

“We need a kind of European stock exchange so that successful companies such as biotech firms from Germany do not have to go to the New York Stock Exchange,” he explained. “Our companies need a sufficiently broad and deep capital market so that they can finance themselves better and, above all, faster.” This is a significant change from Germany’s previous position.

It appears that EU leaders are aware of its problem and how urgently they need to fix it. With the tools laid out in front of them, what is holding them back?