Capital Markets Development in the EU: An In-depth Analysis

Recent empirical studies reveal a series of interconnected structural obstacles that hinder the effectiveness of European capital markets in facilitating innovation and long-term economic growth. One critical issue is the limited engagement of households with risk capital, resulting in a notable imbalance between Europe’s substantial savings and their corresponding financing requirements. Moreover, when households do participate in equity investments, a considerable portion of their capital is funneled towards the United States, indirectly bolstering its innovative sectors. To transition the Savings and Investments Union (SIU) agenda from aspirations to actionable priorities, it is essential for policymakers to establish clear and straightforward metrics that can assess the distance of European capital markets from their potential and identify areas where fragmentation remains most consequential.

The analysis builds on previous frameworks and proposes a mapping of market development and integration indicators to specific bottlenecks within the Capital Markets Union (CMU). This approach encompasses three essential stages: facilitating access to capital markets (termed “entry”), enabling cross-border scaling (or “expansion”), and enhancing opportunities for financing growth to yield successful outcomes (referred to as “exit”). By presenting a consolidated set of CMU indicators corresponding to these objectives, the goal is to underline significant structural gaps and evaluate progress on CMU targets aligned with the SIU strategy.

Households’ Investment Patterns in the EU

European households demonstrate a tendency to save a notably high percentage of their disposable income when compared to other global economies. However, a significant portion of their financial assets is allocated to traditional bank deposits, which substantially underscores the unrealized potential for these savings to be channeled into productive investments. On average, households in the EU maintain approximately one-third of their financial assets in cash and deposits, while investments in securities constitute merely half of that proportion. If European households were to adjust their deposit-to-financial assets ratio to mirror that of American households, an estimated €8 trillion could be redirected towards long-term, market-oriented investments.

The European Commission’s recommendation regarding Savings and Investment Accounts (SIA), issued in September 2025, aims to unlock this extensive potential, thereby allowing savers to invest in products specifically designed to finance European enterprises and support the ambitious twin transition. Furthermore, the proposed pension package, which aims to promote automatic enrollment and the adoption of supplementary pensions, seeks to mitigate key barriers preventing pension funds from entering equity markets, representing a pivotal aspect of this undertaking.

Financing Preferences and Euro Area Investment Dynamics

When capital does penetrate the capital markets, data suggests that euro area households predominantly finance companies located outside the EU. In examining both direct and indirect equity investment exposures of euro area households, approximately half of their holdings are in entities that issue securities beyond the EU. Yet, disparities across the eurozone are significant; for instance, less than 23% of equity investments held by Slovak households were from EU issuers, whereas over 86% of equity investments by French households originated within the EU. Currently, US capital markets account for 34% of total euro area equity holdings, which is comparable to domestic equities at 35%, underlining the persistent allure of US markets, which generally offer higher returns than those available in Europe.

This inclination towards US equities is especially evident in indirect investments; nearly half (47%) of the total equities invested through European funds are allocated in the US, in alignment with its proportionate weight in global portfolios. While a broader scope of international diversification typically provides enhanced risk protection for investors, an excessive exposure to certain sectors within the US market and securities denominated in USD represent significant contagion channels that need addressing.

Barriers and Opportunities for Growth in European Venture Capital

The fragmentation of the EU capital markets is a fundamental hurdle to achieving adequate scale and liquidity necessary for attracting investments and amplifying returns. Fragmented supervision, inconsistent tax regimes, and variances in market infrastructure only serve to amplify these inefficiencies. It is crucial to expedite regulatory harmonization and eliminate structural barriers to cross-border investments to enhance the appeal of EU capital markets. The market integration package proposed by the European Commission could yield considerable advancements in this area.

Moreover, initial public offerings (IPOs) and venture capital (VC) investments within the EU have historically fallen short in comparison to their US counterparts. The performance of US IPOs has consistently surpassed those in Europe across all segments, with median valuations in technology-centric industries often tenfold compared to those recorded in Europe. This trend is mirrored in private markets, where VC investment in the EU remains markedly lower both in relation to GDP and median deal size. The root of this discrepancy lies in both demand for and supply of capital: a deficiency in adequately sized VC funds within Europe, which is somewhat compensated by the robust presence of foreign investors.

Conclusion and Future Recommendations

The prevailing underdevelopment of Europe’s VC ecosystem is further compounded by household investment behaviors favoring traditional sectors while diverting equity capital towards innovative industries in the US. Specifically, EU households primarily allocate funds to financial sector corporations concerning EU-issued equities, in stark contrast to their investments in high-tech manufacturing and services in the US, which command a significantly greater share. With euro area households holding approximately €35 trillion in financial assets, the investment in European high-tech sectors represents merely 1% of this total.

To foster the efficient realization of policy measures proposed under the SIU strategy, such as the SIA Recommendation and the revision of the Solvency II and IORP II frameworks, swift implementation will be necessary to promote equity market development. In the long term, structural barriers inhibiting integration can be addressed through the aforementioned market integration package on supervision and infrastructure, along with enhanced fiscal convergence to bolster the scale and liquidity of capital markets. Ultimately, strengthening domestic investment and growth is vital, particularly as the EU’s persistent current account surplus reflects a structural tendency towards excessive savings relative to domestic investment levels. Cultivating deeper venture capital markets will be crucial in augmenting the long-term availability of risk capital needed for Europe’s innovative firms to thrive.