Europe faces a financial paradox. On the one hand, European citizens are diligent savers, with households holding more than €37 trillion in financial assets. On the other, a large portion of this sits idly in cash and bank accounts earning modest, if any, returns.
This conundrum not only limits long-term personal wealth growth but also hinders the development of more dynamic capital markets that could help fuel innovation and economic growth across the European Union.
It’s time for a shift in mindset to empower more investment in Europe’s capital markets. European citizens must be provided with better avenues and incentives to benefit from productive investments.
Expanding financial education efforts across all ages can help demystify the world of capital markets and encourage people to explore equity investments as a tool for long-term wealth building
Faced with demographic challenges, public pension systems are facing increasing strains. As it stands, many pension systems across Europe will struggle to sustain these pressures, given the reliance on the pay-as-you-go model. While public pensions are a cornerstone of most contemporary systems, this challenging situation in which we find ourselves deepens the need to encourage more private savings as an essential complement, ensuring citizens are better prepared for retirement.
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Championing such a shift is as much about culture and education as it is about correct policy. Building a culture of private savings and investments in the capital markets demands an evolution of existing behaviours.
This starts by empowering people through knowledge. Expanding financial education efforts across all ages can help demystify the world of capital markets and encourage people to explore equity investments as a tool for long-term wealth building.
Financial education alone is not enough. As outlined in the European Securities and Markets Authority’s position paper on building more effective and attractive capital markets, EU and national policymakers need to step in by fostering simple and cost-efficient investment options.
Well-structured investment vehicles also provide the additional benefits of being administratively straightforward and easily accessible
This should be backed by appropriate protection and incentives for citizens to participate in capital markets. For example, the creation of tax-advantaged investment accounts — similar to the Swedish Investeringssparkonto (ISK) — could encourage citizens to take the plunge into becoming investors in capital markets.
Such well-structured investment vehicles also provide the additional benefits of being administratively straightforward and easily accessible. They also nurture financial learning by stimulating an interest in investing.
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While some countries have implemented different versions of such schemes, looking at this from an EU perspective will ensure the same opportunity is provided to the entirety of the European Union’s population and will benefit investors in terms of greater accessibility, scale, and liquidity at the EU level.
Importantly, and in parallel, we must spur the development of vibrant capital markets in the European Union to make them a more attractive prospect for investors — both citizens, as well as larger, institutional investors.
A more dynamic, competitive, and less fragmented market environment will draw the long-term investment that the EU is lacking. In turn, more competitive capital markets support more growth and job creation for the real economy.
High-profile companies like BioNTech and Spotify, both European-born and bred, turned to US stock markets for their public listing
European Union capital markets represent only 11 per cent of global market capitalisation compared to the US’s 45 per cent. On its current trajectory, this share will likely only fall further. Equally concerning, some of Europe’s biggest companies are choosing to list in the US, where markets are deeper and offer better funding conditions.
High-profile companies like BioNTech and Spotify, both European-born and bred, turned to US stock markets for their public listing. Similarly, start-ups and small-medium-sized companies often struggle to find the funding they need to scale up in the EU and turn elsewhere to raise public or private capital.
This is a stark reminder that, if the European Union does not create more attractive conditions for businesses and investors alike, it risks losing its most innovative companies to other jurisdictions.
To tackle this, it’s crucial to ensure that capital raised to support EU business can flow freely, rather than being fragmented across national boundaries. Breaking down remaining barriers is essential in building a truly unified single market for capital.
By making capital markets more accessible and attractive for European citizens, we can lay the foundation for a stronger economy that serves both individuals and businesses
The capacity of European Union capital markets to support innovation and growth in the face of increased global competition and geopolitical challenges has become a core issue. Several recent prominent reports have pointed to the need to boost productivity, competitiveness, and innovation to attain inclusive economic growth.
Stretched public purses will not be able to fund this alone, meaning private investment must be scaled up to fill the gap. This provides an opportunity to marry the objectives of empowering individuals to invest for their financial wellbeing and boost the capital pool while strengthening capital markets in parallel. After all, a rising tide lifts all boats.
By making capital markets more accessible and attractive for European citizens, we can lay the foundation for a stronger economy that serves both individuals and businesses.
With the right mix of education, incentives, and policy reform, Europe can unlock its potential and build deeper, more attractive capital markets to support its economy and better compete on the global stage.
- Verena Ross is Chair of the European Securities and Markets Authority
