Bridging the Growth Gap

Europe’s economy is at a critical point. Seven years since the onset of the financial crisis, economic growth remains muted, public debt in some countries is still stubbornly high, and deflation threatens to prolong this period of stagnation. After years of economic uncertainty, Europe must look at new ways to deliver growth and jobs.

Against this background, the Association for Financial Markets in Europe has published Bridging the Growth Gap, a new analysis of the differences between European Union (EU) and U.S. financing in the areas of small and midsize enterprises, infrastructure, and private placements. A collaboration with The Boston Consulting Group, this report canvasses the views of some of the largest global investors (representing €9 trillion of assets under management) and supplements them with desk research.

The study reaches revealing conclusions. It shows how the fragmentation of Europe’s financial markets and relatively smaller size of aggregate investable assets act as a brake on growth when compared with the U.S. More than 20 years after the birth of the EU, the institutional investors interviewed told us that issues such as differences among national regulations and tax rates were still holding back growth.

The research also suggests that Europe is overreliant on bank funding, and that Europe’s capital markets are significantly underdeveloped compared with those in the U.S. It estimates that Europe has approximately €30 trillion in external funding outstanding, against roughly €49 trillion in the U.S. Similarly, Europe has approximately half as much listed equity capital: €10 trillion versus €19 trillion in the U.S.

These findings are extremely topical at a time when the European Commission is proposing a Capital Markets Union and has recently announced its €315 billion European Fund for Strategic Investments.