How to Mobilise European Capital
Digitalisation, decarbonisation and deglobalisation are the three key pillars to the next investment surge. McKinsey & Company estimated that global spending on decarbonisation and renewal projects may reach $130tn by 2027.
In the EU alone, the European Commission estimated that another €620bn and €125bn is required each year until 2030 for decarbonisation and digitalisation, respectively. However, the unprepared European capital markets will weaken productivity and reduce the transformation demanded by the next investment surge.
European capital markets have long lagged behind their US counterparts. Capital markets are often organised along national borders, making financing conditions vary. Whilst private European investors provide capital close to home, institutional investors look across the other side of the Atlantic, the US, for more attractive returns.
On top of this, many European startups are emigrating to the US, whose capital market is nearly twice as large, for ease of access to money. Almost a third of European startups valued at over €1 billion founded between 2008 and 2021 moved abroad. This includes companies like Taldesk, an AI-powered cloud customer service platform, established in Lisbon that crossed the Atlantic for growth.
As a result, American and Chinese companies have extended their dominance in global markets, pooling capital far more efficiently.
Consequently, an EU capital markets union (CMU), transforming the fragmented national capital markets into a single diversified capital market, looks increasingly attractive. This would increase the pool of finance available and reduce the cross-national costs and legislative bureaucracy.
Nonetheless, the CMU, first proposed by Christine Lagarde, has faced resistance. Many member states have prioritised domestic policies over greater European integration, and express varying risk appetites and investor behaviours. This stems to an extent from the added complexities of regulatory inconsistencies.
A CMU with regulatory consistency would reduce legal uncertainty, enabling efficient capital flows and enhancing investor confidence. With an easier availability of funds, start-ups’ need to relocate will cease.
Many have also called for reforms to the fragmented European venture capital (VC) ecosystem to retain start-ups. This VC market accounts for precious few success stories, which undermines investor confidence and repels pension funds, which are a dominant low-risk stable-returns institutional investor. Currently, European pension funds allocate only 0.018% of their assets to VC, whilst, in the US, this stands at 1.9%.
The lack of equity financing lies at the heart of the issue; integrating VC pools into the EU would correct this. This would encourage institutional investors to allocate greater capital, which could be incentivised further by tax breaks. Addressing these barriers through incentives and institutional investor collaboration could unlock significant capital, foster innovation, and retain European startups. A strong VC market is necessary if Europe wishes to compete with America and China.
Private credit markets also need reform. The lack of a burgeoning market is partly cultural; the financial system is far more bank-centric. This inadvertently stifles investment through the tighter restrictions on banks post-2008, especially with leveraged lending, that is the practice of providing loans to borrowers with higher levels of debt relative to income or assets. Thus, service to riskier borrowers, who are often the most innovative, are negatively impacted.
US private credit is also increasingly effective through its financing of overlooked borrowers and has expanded into infrastructure, real estate, and project finance. In these industries, flexible financing is increasingly sought after; and, moreover, institutional investors’ long term capital provides greater stability than banks that rely on short-term deposits.
Private credit has, as a result, ballooned into one of the largest asset classes, reaching nearly $2 trillion by the end of 2024 — a tenfold increase since 2009. Many estimates place the addressable market, in the US alone, at around $30 trillion. Europe must, if it wishes to progress in the riskier investment necessary for the future, unlock the untapped private credit market across the continent.
Another legacy of the financial crash is the weakened European securitisation market. In a securitisation transaction, banks bundle existing loans and then issue securities sold on capital markets. This makes room on balance sheets, allowing banks to issue new loans and facilitate new investment opportunities.
The US has demonstrated its leadership in this field too. US data centre securitisations totalled $24.3 billion since 2018, while solar securitisations raised $27 billion in the same period. In the EU, however, data centre securitisations are small, while solar securitisations only raised €230 million in 2024. Money into these segments — digitalisation and decarbonisation — is all positive and something the EU desperately needs.
The EU must act to build a strong, single capital market, complemented by significant financial reform. Otherwise, the EU risks financial insignificance as it becomes dwarfed by the innovative superpowers, the US and China. But, more importantly, the flows of investment necessary for the green or digital transition will run dry. If reforms are stalled any longer, Europe may fall irretrievably behind.
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