Ideas, inventors, and savings abound throughout Europe. Europeans save a larger percentage of their income than Americans do, and they account for about the same percentage of worldwide patent applications as Americans. However, Europe frequently has trouble transforming concepts into innovative technology that might spur economic expansion. One of the reasons is that, in comparison to the US, it is far less able to use its substantial savings to expand innovation.
The EU has responded by attempting to create a “capital markets union” for years. There have been 50 non-legislative initiatives and around 55 regulatory proposals since 2015. However, little progress has been made despite a broad agenda. Europe has to shift its attention to finding a smaller number of solutions with the best return and revealing the main obstacles in the funding pipeline. Today, three stood out.
First, not enough of Europe’s savings are making their way into the stock markets. Compared to Americans, who own a tenth of their financial assets in cash and deposits, Europeans own a third. A stock of up to €8 trillion ($8.4 trillion) might be channeled into long-term, market-based investments if EU consumers were to match US households in terms of their deposits to financial assets.
The European retail investing environment is a hindrance to this kind of diversification. Many households have to deal with expensive fees and a lack of appropriate investing alternatives. For instance, fees paid by retail investors in European mutual funds are about 60% more than those paid by their American equivalents.
It is the matter of the economy of scale, the EU has a very disjointed collection of financial market infrastructures. There are 32 central securities depositories (csds), 14 central counterparties, and 295 trading venues in the EU. There are just two securities clearing houses and one CSD in the US.
The best course of action is to implement a “European savings standard,” which is a standardized set of savings products that apply to the whole EU. These products would provide a variety of investment possibilities organized based on precise criteria, and they would be transparent and easily accessible. Because there would be more competition, greater comparability, and less red tape, they would also be more inexpensive. Harmonizing tax benefits across nations would further increase the appeal of the European norm.
In order to crowd private capital into European VC and share risks, the EU should also make the most of the European Investment Bank. Additionally, it must investigate ways to encourage innovation through finance as well as equity. European banks may be able to increase their involvement in funding innovation and free up balance-sheet space by developing securitization.
Source: Economist
