Policy brief

Europe should not neglect its capital markets union

The European Union’s capital markets remain very underdeveloped compared to the United States.

Publishing date
07 June 2021

This Policy Contribution was produced with the financial support of the European Forum Alpbach

The completion of Europe’s capital markets union is desirable not only from a financial stability standpoint. Equity-based financing is also better suited than banks to finance high-growth sectors (such as digital and hi-tech) where most capital is intangible. Additionally, stock markets reallocate funds towards less-polluting sectors more efficiently than banks, and provide incentives for carbon-intensive sectors to develop greener technologies.

Capital market underdevelopment in Europe is evident when comparing company financing structures to other advanced economies. Even listed companies in Europe are substantially more bank-financed than in the United States, while the aggregate market capitalisation of listed firms is much smaller relative to GDP. Venture capital investments are ten times higher in the US than in Europe (as a share of GDP), and even more so in a handful of Asian countries (Singapore, China, India). European companies, especially in tech, are much more likely to be acquired by American firms than the other way around.

Simultaneously, EU institutional investors are comparatively underinvested in equity products, and a large share of their existing equity investments is in extra-euro-area stocks
(chiefly in the US).

This is unsurprising considering that the market premium or country risk premium (the difference between the internal rate of return on equities and the risk-free rate) is around four percentage points higher in EU countries than in the US. This indicates that only companies that cross a much higher returns threshold can access equity financing.

An updated European Commission capital markets union action plan, published in September 2020, contains interesting proposals but the language remains vague. Possible legislative progress could come from reforming the European Securities and Markets Authority into a strong centralised authority, reviewing the legislative framework that applies to institutional investors in order to facilitate equity investments, and harmonising business insolvency laws and their application.


Recommended citation

Demertzis, M., M. Domínguez-Jiménez and L. Guetta-Jeanrenaud (2021) 'Europe should not neglect its Capital Markets Union', Policy Contribution 13/2021, Bruegel

About the authors

  • Maria Demertzis

    Maria Demertzis is a Senior fellow at Bruegel and part-time Professor of Economic Policy at the Florence School of Transnational Governance at the European University Institute. She was Bruegel’s Deputy Director until December 2022. She has previously worked at the European Commission and the research department of the Dutch Central Bank. She has also held academic positions at the Harvard Kennedy School of Government in the USA and the University of Strathclyde in the UK, from where she holds a PhD in economics. She has published extensively in international academic journals and contributed regular policy inputs to both the European Commission's and the Dutch Central Bank's policy outlets. She contributes regularly to national and international press and has regular column that appears twice a month in various EU newspapers and on Bruegel’s opinion page.

  • Marta Domínguez-Jiménez

    Marta Domínguez Jiménez was a Research Analyst at Bruegel. Her research focuses primarily on monetary policy, financial systems and international trade and capital flows. She has published on these issues for Bruegel, in academic journals and European Parliament and Commission reports, among others.

    She holds a bachelor from the University of Oxford, where she specialised in international macroeconomics and monetary economics, and a Master's from the College of Europe in Bruges. Before joining Bruegel, she was an Analyst within the Markets division of Citigroup in London, where she worked on the structuring of bespoke fixed income products and developing systematic quantitative investment strategies.

    Marta is fluent in Spanish and English, and proficient in German and French

  • Lionel Guetta-Jeanrenaud

    Lionel worked at Bruegel as a Research Assistant until August 2022. He studied economics at the Ecole normale supérieure de Lyon, in France. Before joining Bruegel, Lionel worked as a research assistant at the Department of Economics of Harvard University.

    His Master’s thesis investigated the impact of newspaper closures on anti-government sentiment in the United States. In addition to media economics and political economy, his research interests include fiscal policy and the digital economy.

    Lionel is a dual French and American citizen.

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