01 March 2024

AFME's Mills: A Turning Point for Europe's Capital Markets

Now is the time to define a fresh policy agenda for the next five years that can ensure the EU’s vibrancy and competitiveness. The EU’s policy approach to capital markets will play a key role.

The European Union (EU) is at a critical juncture, facing a decline in its competitiveness on the global stage. With European elections in sight and a new European Commission (EC) set to take up its post later this year, now is the time to define a fresh policy agenda for the next five years that can ensure the EU’s vibrancy and competitiveness. The EU’s policy approach to capital markets will play a key role.

Take the evolution of initial public offerings (IPOs) by European corporates. Before the creation of the European Single Market, corporates from the EU-27 Member States accounted for 5 percent of global IPOs. Following the first few years of the Single Market in the 1990s, this figure soared to 20 percent. Yet, over the past three years, this statistic has plummeted to levels of around 7 percent. Many Member States are understandably concerned about the EU’s lack of public listings, creating a litmus test of the EU’s ability to scale up the businesses it needs to maintain competitiveness. Yet companies are more likely to be attracted by the greater depth, liquidity and resulting higher valuations offered by markets outside the EU.

Further key figures underscore the challenge: The EU’s share of global gross domestic product (GDP) is around 17 percent, but its share of the world’s total market capitalisation currently stands at only 13 percent. Capital markets’ funding of EU corporates remains on average at around 10 percent—a similar level to that recorded by the Association for Financial Markets in Europe (AFME) in 2018. Meanwhile, market-based financing in the United Kingdom and the United States averages 26 percent. The EU remains a predominantly bank-funded economy.

Notably, the EU faces additional challenges, including demographic pressures on public budgets and state pension systems. Finding ways to keep pensions financially sustainable in the long term against the background of an ageing population is creating an urgent need for citizens to seek suitable alternative solutions for retirement. The sustainable transition will further strain financial resources, with an estimated EUR 700 billion annual requirement for ambitious environmental targets...

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