European Union: Recovery plans and Capital Markets Union

The European “think tank” Bruegel has released the paper “Europe should not neglect its capital markets union”, calling to the urgent need of completing the unified capital market in the European Union (EU). A deep and efficient capital market is needed to finance Europe’s economic recovery post pandemic as the transition towards a more digital and lower carbon emission economy will require financing intangible capital.

Some of the reasons to complete urgently the Capital Markets Union (CMU) in the EU, according to Bruegel's paper:

• Capital market is underdeveloped in Europe vs US and other regions, and this could result into financial constrains in terms of financing intangible capital and lower efficiency in the greening transition. The report provides several figures and conclusions in this regard:

‑ Listed companies in Europe are substantially more bank-financed than in the United States, with higher debt-to-equity ratios on average (1.41) than companies in the US (1.02), China (1.09), Japan (1.20) and South Korea (1.14).

‑ The aggregate market capitalisation of listed firms is much smaller relative to GDP (175% for US against 122% for Japan, 60% for Europe and 59% for China). 

‑ The amount of venture capital investment, better suited than banks to finance high growth sectors (such as digital and hi-tech) where most capital is intangible is more than ten times lower in European countries than in the US (0.044% of GDP versus 0.633%).

‑ The lack of access to VC investment makes young, promising companies even easier targets for foreign acquirers, further undermining the size of European capital markets.

• For that reason, Europe’s recovery needs a deep and efficient capital market to finance the transition towards a more digital and lower carbon emission economy:

‑ As digitalisation in the EU will require massive investments in intangible capital (IC) (European countries invested an average of 3.5% of GDP in IC between 1995 and 2000 and 7.6%, from 2014 to 2017, against over 10% in the US) and banks are not well suited to finance IC (because it cannot easily be collateralized).