## EUROPE’S ELUSIVE SAVINGS AND INVESTMENT UNION

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**Canonical URL:** [EUROPE’S ELUSIVE SAVINGS AND INVESTMENT UNION](https://www.imf.org/-/media/files/publications/fandd/article/2025/06/balakrishnan.pdf)

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### Overview
- Europe has ample savings but not enough investment; a savings and investment union (SIU) is proposed to mobilize pan‑European savings for investment across the EU.
- The SIU idea has renewed momentum after reports in 2024 and the European Commission’s March 2025 SIU strategy.
- A single financial market must offer attractive investment returns, which requires less red tape and uniform regulation across EU states.

### Fragmentation and key barriers
- Savings are largely domestic, with about 80 percent held in bank deposits, contributing to a pervasive “home bias.”
- The EU banking union remains incomplete and is a key obstacle to an SIU.
- Low issuance of securitized assets reflects lack of uniform regulation and high capital charges; underlying assets are national (largely residential mortgages) and national regulatory differences impede EU-wide packaging.
- Institutional holders limit holdings because of high capital charges imposed by the European Insurance and Occupational Pensions Authority, keeping assets on bank balance sheets.
- Pension portability is limited across the EU, confining investment within national schemes.
- Fragmented capital markets contribute to lower scale and dynamism:
  - The EU is home to less than 15 percent of start-ups valued at more than $1 billion (“unicorns”).
  - EU scale-up firms raise 50 percent less capital on average than their US counterparts in their first 10 years.
- Corporate borrowing spreads: borrowing spreads on corporate euro area bonds are not significantly higher than in the US (see Chart 1 in source).

### Regulatory variability, trade costs, and red tape
- Regulatory differences impede firm expansion across EU markets and raise intra‑EU trade costs:
  - According to EIB surveys, 60 percent of EU exporters and 74 percent of innovators report they must comply with significantly different regulations across EU countries.
  - IMF estimates suggest remaining intra‑EU trade barriers are equivalent to an ad valorem tax of 45 percent for the manufacturing sector and up to 110 percent for the services sector.
- Compliance and red tape costs:
  - Cost of dealing with regulatory compliance is 1.8 percent of sales on average (2.5 percent for small and medium enterprises).
  - EU firms’ energy costs have been about 4 percent of sales.
  - The EU aims to reduce the reporting burden by 25 percent for all companies and by 35 percent for small and medium enterprises.

### Role of banks, capital structure, and venture capital
- Banks dominate EU savings intermediation; 80 percent of savings in deposits limits cross‑border lending and capital market development.
- Banking fragmentation produces substantial variation in borrowing costs for households and especially small and medium-sized businesses; divergence reflects bank funding costs tied to sovereign funding and limited competition.
- Large US banks have more than 60 million customer accounts each; no European bank comes close, limiting economies of scale and cross‑selling synergies in Europe.
- With bank resolution largely national, banks’ activities remain largely national and cross‑border liquidity flows are limited.
- Equity capital is more expensive in the EU than in the US, reflecting a much larger US market and Europe’s fragmented markets.
- Venture capital gap: IMF calculations indicate venture capital funds raise seven times more in the US than in the EU, reflecting smaller EU private capital pools.

### Implications for investment and returns
- An integrated financial market alone is unlikely to close the investment shortfall identified by Draghi (about 5 percent of GDP per year shortfall).
- A bigger pool of savings and lower cost of capital are necessary but not sufficient; firms will invest more if they expect higher returns, requiring reforms and deregulation that expand markets.
- Lack of uniform regulation in the single market limits firms from scaling up by expanding into other EU markets and is a likely driver of persistent growth divergence between the US and the EU, manifesting in lower rates of return on EU investments.

### Policy directions and priorities
- Complete the banking union or, at minimum, allow more cross‑border mergers and let banks move liquidity where returns are reasonable to foster pan‑European savings products and investment instruments.
- Harmonize financial regulation and supervision (e.g., strengthen European Securities and Market Authority roles and common reporting requirements) to reduce fragmentation.
- Reduce regulatory variability and red tape to lower compliance costs (target reporting burden reductions: 25 percent for all companies, 35 percent for SMEs).
- Promote deeper capital markets through securitization reforms, lower capital charges for institutional holders, pension portability, and policies that encourage venture capital growth.
- Pursue competitiveness and single market reforms simultaneously with financial market integration to raise gross rates of return and create a positive feedback loop: lower trade barriers and red tape → higher returns → more unified regulation and cross‑border capital movement.

*Ravi Balakrishnan and Mahmood Pradhan*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/06/balakrishnan.pdf_