A shortage of risk capital and under-developed capital markets are holding back growth in Europe, according to a new study comparing financing for business in Europe with the US.
The report by the Association for Financial Markets in Europe (AFME), “Bridging the growth gap: Investor views on European and US capital markets and how they drive investment and economic growth,” co written with the Boston Consulting Group (BCG), shows that Europe has a significantly smaller pool of investable assets than the similar sized US economy. But the real problem is the fragmented nature of European markets and the lack of equity finance.
The AFME report draws on a survey of global investors holding around €9tn assets under management and provides a unique, in-depth analysis of how capital markets in Europe and the US compare, and how these differences may have contributed to the wide disparity in growth rates since the financial crisis.
Key findings on Europe’s capital markets compared to the US:
Simon Lewis, chief Executive of AFME, said: “Under-sized capital markets are limiting growth in Europe, but more important is the lack of risk capital. This is a particular problem for SMEs, where the lack of equity is preventing the development of the entrepreneurial ecosystems that nurture growth sectors such as technology, communications and energy.”
Philippe Morel, global leader of Capital Markets at the Boston Consulting Group, said: "There are two particularly interesting dynamics at play which became clear during our conversations with institutional investors. The fragmentation in Europe is off-putting: working with 28 individual countries is burdensome in comparison to investment in the United States where one legal and regulatory system applies. Secondly, there is a strong sense amongst the investor community that there is less of an appetite for risk in Europe, and as such, alternatives to bank lending are not as readily available for SMEs in Europe when compared to the US."
In the Financial Times today, Michael Sherwood and Richard Gnodde co-chief executives of Goldman Sachs International, write that a ‘big bang’ via a capital markets union is needed to expand Europe’s economy:
Europe needs a market-based financial system that allocates capital efficiently to households and businesses from Lisbon to Ljubljana — and that means it needs not just a banking union, but a capital markets union, too. [ ] Europe’s financial system has traditionally centred on banks, which provide about 70% of European firms’ external financing, with the remainder coming directly from securities markets.
In the US, these shares are reversed. Bank dependence is both a cause and a consequence of the structure of the European corporate sector, which is dominated by small and medium-sized enterprises that cannot access capital markets directly."