## Introduction ## Source details **Canonical URL:** [Introduction](https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025113-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2025/english/wpiea2025113-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2025/english/wpiea2025113-print-pdf.pdf.json) --- ### Key findings on productivity divergence - In 1995, labor productivity aggregated across the current European Union (EU)-27 member states was around 90 percent of the level of productivity in the United States (US). - By 2024, output per hour in the EU was around 80 percent of the US level. - Over the past three decades, despite access to similar frontier technologies, labor productivity grew much more slowly in Europe than in the US. - Small enterprises dominate Europe’s production structure and their scale-up potential is often stymied by regulatory and financial constraints. ### Macroeconomic and policy implications - Faster productivity growth in the EU would yield additional resources for: sustaining Europe’s social model and intergenerational social contract; enabling transformative investments in the clean energy and digital transitions; strengthening defense capabilities; and improving debt service capacity. - Stronger productivity can improve profitability, incentivize more investment, and support job creation and social cohesion. - Illustrative simulation results: - Over the medium- to long-term, EU GDP level could be about 3 percent higher than in the baseline. - Potential growth of the EU economy is projected at just above 1 percent. - Individual member states’ GDP levels could increase relative to baseline in a range of 2-5 percent over 10 years. *Source: IMF Working Paper — Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market (Introduction).* --- ### Binding Constraints on Cross-Border Scale Up ### Conceptual basis - Stronger productivity growth emerges from diffusion of new technologies and reallocation of capital and labor to more productive firms, often via scale-up of younger and smaller firms. - Structural transformation requires: an enabling regulatory environment, easy access to finance, labor mobility, and affordable, reliable energy. ### Identified binding constraints - Fragmented regulation. - Inefficient and fragmented financial intermediation. - Insufficient labor mobility. - Fragmented energy system. --- ### Constraint 1: Regulations ### Core problem and institutional elements - Fragmented regulations lower predictability and increase transaction costs for firms seeking to scale up across borders. - 60 percent of EU exporters report the need to comply with different standards and consumer protection rules across member states. - The EU legislative framework operates under the principles of conferral, proportionality, and subsidiarity. - Share of EU-level regulations in the total ranges from 20 to 80 percent, depending on the area. - Shared competence between EU and member states often results in overlapping and inconsistent regulations. - “Gold-plating” and varying national transposition and enforcement contribute to fragmentation. - OECD (2022) reported that around 90 percent of EU countries had only partially implemented international regulatory co-operation policies. ### Effects on firms and trade (key statistics) - Since the start of the single market: - Trade costs for goods have declined by an average of 20 percent. - Trade costs for services have declined by only 7 percent. - Remaining trade barriers within the EU are estimated at a tariff-equivalent of 44 percent for goods and 110 percent for services. - Fragmentation increases administrative burdens, deters cross-border scale up, reduces demand for risk capital, and can lead firms to remain small. --- ### Constraint 2: Finance ### Core problem and structural features - Europe’s financial system is largely bank- and nationally-based and exhibits a high degree of home bias. - Capital markets remain relatively shallow despite plentiful savings and de jure international financial integration. - Bank-dominated systems mobilize funding from national retail depositors and are not well suited for financing risky ventures and young firms that lack tangible collateral. - National fragmentation of the EU financial system, including payments systems, imposes barriers on productive firms seeking to scale up and expand across borders. ### Capital markets depth, fragmentation, and home bias (findings and statistics) - EU households hold one-third of their financial assets in cash and bank deposits, compared with only one-tenth in the US. - Only 24 percent of respondents to a 2023 Eurobarometer Survey during 2021-23 had an investment product (funds, stocks or bonds). - 22 percent of respondents had a private pension or retirement product. - If EU households were to increase their ratio of deposits to financial assets to a level at par with that of US households, up to €8 trillion ($8.4 trillion) could be available for long-term, market-based investment (Lagarde 2024). - Assets held in private pension funds and insurance companies collectively amount to some $11.9 trillion in the EU, about a quarter of the US’ roughly $42.5 trillion (Arnold and others 2024). - EU pension and insurance funds allocate just 0.02 percent of total assets to VC, while US pension and insurance funds allocate 0.12 percent to VC (IMF staff calculation based on PitchBook and OECD data 2023). - ESMA (2023) finds EU retail investors pay about 60 percent more in fees when investing in mutual funds than their US counterparts do. - EIOPA’s 2024 Eurobarometer survey reveals that only 20 percent of EU citizens participate in an occupational pension scheme (EIOPA 2024c). - On average almost half of EU insurers’ EU equity holdings are in firms based in the insurer’s home country (60 percent in Spain; 70–75 percent in Germany, the Netherlands, and Austria; and 80 percent in France). - EIB (2024b) finds that by age ten, European scale-ups raise 50 percent less capital than their San Francisco peers. ### Retail payments segmentation - Retail payments systems in Europe are largely segmented within national boundaries, imposing relatively high private costs of retail payments for both domestic and cross-border transactions. - High cost of retail payments increases transaction costs for cross-border services and discourages small firms from setting up operations across borders. --- ### Constraint 3: Labor — limited EU labor mobility and barriers ### Key statistics on mobility and regulation - On average, less than 4 percent of the working-age population are nationals of other EU member states; variation: less than 1 percent in several CESEE countries including Poland, Hungary, Romania; around 10 percent in Cyprus, Austria, Malta, Belgium and Ireland; and 40 percent in Luxembourg. - About 5,400 professions covering 22 percent of the EU workforce are subject to regulations across member states. - Only 6 percent of workers who moved within the EU between 2017-2019 used the systems for recognizing professional qualifications. - European Parliament (2024) noted average house prices in the EU increased by 48 percent during 2015-23 and nearly 11 percent of households in cities and 7 percent in rural areas face housing costs exceeding 40 percent of their disposable incomes. ### Elements, barriers, and effects - Language barriers, fragmented recognition of professional qualifications, social security and pension portability challenges, and housing affordability shortages reduce mobility. - Survey evidence: availability of staff with the right skills is a major obstacle to investment for about half of EIB survey respondents (EIB 2024a); this is lower than the 2018 result where nearly 80 percent of firms reported skills as an obstacle. - Labor market frictions reduce mobility, aggravate skills mismatch, and hinder firm investment and scale-up. --- ### Constraint 4: Energy — fragmentation, price volatility, and investment impact ### Findings and statistics - The energy crisis exposed three weaknesses: (i) overreliance on imported fossil fuels; (ii) uneven vulnerabilities across countries; (iii) fragmentation of the internal energy market and interconnection (Kammer 2025). - Over 2023-24 the median wholesale electricity price across EU countries doubled relative to the pre-pandemic level and electricity price dispersion within the EU tripled. - Electricity price volatility over time and across hubs remains more than three times its pre-pandemic average. - Simulation: if there had been no cross-border trade at all, volatility could be more than five times the observed level. ### Elements and effects - Energy policy remains a national prerogative; member states differ in energy intensity, renewable generation potential, and financing costs. - Fragmented institutional setup prevents internalization of network externalities; an integrated energy approach would deliver long-term gains in resilience, supply security, and lower prices. - High and volatile energy prices deter investment, especially in fixed capital and R&D. - 77 percent of European firms view high energy costs as a significant barrier to investment, compared to 68 percent of U.S. firms (EIB 2024 annual survey). - Net share planning to increase investment dropped to 7 percent for 2024 from 14 percent in 2023. --- ### Actionable priorities — overview and selected priorities ### Diagnosis and objective - Four key binding constraints on cross-border scale up in the EU—financial fragmentation, shallow capital markets and home bias, limited labor mobility, and energy market fragmentation—require EU-level reforms to deepen the single market. - Objective: Identify 10 actionable priorities; highlighted here are priorities focused on regulatory fragmentation and capital markets integration. ### Reducing regulatory fragmentation — two priorities - Action 1. Introduce a 28th regime with harmonized legal rules for areas key to firms’ formation, operation and dissolution. - Purpose: voluntary EU-wide legal framework to facilitate firm expansion without navigating divergent national regulations. - Business Code would harmonize corporate and securities law (formation), accounting rules (operation), and insolvency procedures and courts (dissolution). - Critical aspects: (i) a uniform company law framework; (ii) a standardized investment procedure (examples cited: French BSA Air or US SAFE); (iii) unified accounting standards and insolvency procedures, with a single regime applied uniformly and dealt with by a specialized court/judge in the country of incorporation. - Implementation: “coalition of willing” approaches (enhanced cooperation or intergovernmental agreement) could increase chances of success. - Risks: complex adoption alongside national regimes; unified regime cannot be as exhaustive as national regimes; national rules may still be needed in some cases. - Action 2. For new rules, prioritize fully harmonized EU-level legislation and, for existing rules, simplify, consolidate and codify. - Prioritize regulations (over directives) where allowed; strengthen enforcement where directives are required. - Conduct a horizontal review of EU-level regulations to identify overlaps and areas for simplification, consolidation, and codification. - Expedite implementation of the “Once-Only Principle” to reduce administrative burdens. ### Advancing the Capital Markets Union (CMU) — targeted actions - Strategic orientation: - Move away from a bank-dominated, mostly national-based financial system where savings remain silo-ed in low-yielding deposits toward a system that supports risk-taking, scale up, and better returns on savings. - A CMU anchored by a permanent European safe asset could provide a benchmark yield curve and enable better pricing of risky financial products. - Action 3. Expand the pool of capital. - Reduce transaction costs and incentivize EU households to rebalance away from bank deposits toward capital markets. - Implement automatic enrollment in voluntary occupational pension schemes. - Improve financial literacy: 2023 European Commission survey shows on average 52 percent of respondents are financially knowledgeable. - Action 4. Channel saving to early-stage, risky assets through increasing venture capital investment. - Current allocations: 0.02 percent of total assets to VC by EU pension and insurance funds vs. 0.12 percent in the US. - Aimed target: an increase to about half of the level of VC investments of US pension funds and investment funds (in US dollar terms). - Measures: public initiatives to crowd in institutional investors; scale up European Investment Fund resources and set up a sizable fund-of-funds aimed at institutional investors to invest in large (>€500 million) pan-EU focused VC funds. - Review regulatory constraints (including Solvency II changes and forthcoming Delegated Act) and national quantitative limits. - Action 5. Allow more efficient cross-border allocation through more integrated markets. - Offer saving products that provide low-cost options for savers to invest across the EU. - Revise and make ambitious improvements to the Pan-European Personal Pension Product (PEPP) Regulation. - Accelerate adoption of the FASTER Directive (deadline for national transposition is 2030). - The proposed digital euro could reduce segmentation of retail payment systems. - Strengthen ESMA’s institutional and governance arrangements for supervision. --- ### Box — PEPP Review (summary of recommendations) - Expand the PEPP to occupational pensions to allow tax-efficient employer contributions and exploit scale. - Equalize taxation of PEPPs to that of national pension products in the jurisdiction where offered. - Equalize regulatory treatment to allow switching between national PPPs and PEPPs and ensure comparable regulatory conditions. - Review existing cap on fees: current cap is 1 percent annually of assets under management for basic PEPP products; consider lifting the cap if evidence shows providers are restricted by distributional channel costs. - Review compartments for cross-border workers: consider making sub-account requirement optional; enable holders to request sub-accounts (against a fee) and clarify definition of “residence” for temporary cross-border workers. --- ### Scenarios, modeling, and simulated impacts ### VC scaling scenario - Scenario: Increase VC by raising the share of VC investment by pension and insurance funds to an outcome of 0.19 percent of assets under management. - This outcome would equal about 50 percent of the level of US pension and insurance funds’ VC investments (in US dollar values). - Country-level assumption: countries with low VC catch up to the current level of the top three member states (Estonia, Denmark, and Sweden). - Implication: tripling VC at the EU level from a very low level (0.075 percent of GDP over 2021-2023) by 2035. - Transmission: - Apply Mollica and Zingales (2007) coefficient: an increase of 10 percent in the volume of VC investment increases the total number of newly created firms by 2.5 percent. - Apply Gourio and others (2016) coefficient: a one-standard-deviation shock to the number of start-ups leads to an increase in TFP of about 0.09 percent after four years. - Modeled GDP impact in 10 years from increased VC investment: 0.9 (percent). ### Labor mobility scenario - Modeled outcome: Increased within-EU labor mobility as an immediate outcome from implementing Actions 6-8. - Assumption: 12 advanced EU countries on average receive additional immigrants from the rest of EU, resulting in a 2-percent increase of the labor supply during 2025-2035. - Modeled GDP impact in 10 years from enhanced labor mobility: 0.9 (percent). - Comparative context: modeled increase (2 percent) is lower than documented peak interstate mobility in the US in the 1990s (3.5-4 percent) and 3 percent during 2019-2022. ### Electricity market integration scenario - Modeled outcome: Lower wholesale and retail electricity prices from implementing Actions 9-10. - Baseline: average wholesale electricity price from January 2004 to March 2025. - Modeled range of wholesale electricity price reductions: lowering electricity prices across EU ranging from a reduction of 3-23 percent. - Modeled GDP impact in 10 years from electricity market integration: 1.1 (percent). ### Insolvency regime adoption - Adopting a high-quality insolvency regime is modeled as a permanent reduction in corporate risk premia. - Adopt unified high-quality insolvency regime GDP impact in 10 years: 0.3 (percent). ### Composite simulation and decomposition - Composite simulation result: Selected reforms in regulation, capital, labor, and energy would increase the GDP level in the EU relative to baseline over 10 years by around 3 percent. - Context: EU potential growth is projected to be just above 1 percent annually over this horizon. - Member state range: Individual member states’ output gains relative to baseline range from around 2 to 5 percent. - Growth accounting decomposition: - Roughly 20 percent of the increase in the level of potential GDP is attributed to gains in TFP. - The remaining 80 percent is explained by factor accumulation—specifically, increased labor input and a larger capital stock from greater investment. ### Model and transmission notes - Modeling framework: Model-Updated Projection Framework (MUP-F) uses impulse response functions (IRFs) produced by the Flexible System of Global Models (FSGM). - Mapping of reforms into MUP-F parameters: - Insolvency reform → permanent reduction in corporate risk premia → increases Tobin’s Q → incentivizes lending and capital accumulation. - Increased VC → more firm creation → faster technology development and diffusion → boosts TFP and capital accumulation. - Improved labor mobility → positive labor supply shock to receiving countries; gradual skill matching improvements in origin countries. - Lower and more stable energy prices → encourage long-term investment and reduce household/firm energy expenses. - Note on TFP feedbacks: The FSGM model does not assume feedback from higher investment or better labor allocation to higher TFP growth; thus decomposition may understate potential TFP gains. ### Upside and downside risks - Upside: Better productivity improvements than assumed; reforms reinforcing each other; complementary national reforms lowering intra-EU trade barriers; higher investment embedding new technology. - Downside: Outdated measures of insolvency regime quality if reforms were implemented after 2022; incomplete energy market integration limiting reductions in energy price level and volatility. --- ### Key quantitative assumptions and headline results - Increase VC at EU level: tripling from 0.075 percent of GDP over 2021-2023 to higher levels by 2035. - VC-related GDP impact in 10 years: 0.9 (percent). - Adopt unified high-quality insolvency regime GDP impact in 10 years: 0.3 (percent). - Enhance within-EU labor mobility GDP impact in 10 years: 0.9 (percent). - Lower electricity prices GDP impact in 10 years: 1.1 (percent). - Aggregate simulated cumulative gains in potential output in 2035 compared to baseline: around 3 percent for the EU (with member-level Min and Max ranging approximately from 2 to 5 percent). --- ### Policy implications and recommended priorities (summary) - Address four binding constraints: fragmented regulations, inefficient financial intermediation, limited labor mobility, and a fragmented energy market. - Priorities: - Regulatory harmonization (including adopting a unified high-quality insolvency regime and prioritizing fully harmonized EU-level legislation where appropriate). - Enhanced access to finance (expanding long-term capital and channeling savings to early-stage, risky assets through increased VC investment). - Improved labor mobility (modernize recognition of professional qualifications; strengthen social security coordination and portability of supplementary pension rights; promote portability of wage contracts; improve housing affordability and address language barriers). - Energy market integration (develop a coordinated EU strategy for the energy system transformation; streamline permitting processes). - Complementarity: EU-level actions should be complemented with growth-friendly domestic structural reforms tailored to member states’ circumstances to maximize impact. *Source: IMF staff estimates as presented in the IMF Working Paper "Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market."* ### Introduction ........................................................................................................... ### Introduction ### Key findings on productivity divergence - In 1995, labor productivity aggregated across the current European Union (EU)-27 member states was around 90 percent of the level of productivity in the United States (US). - By 2024, output per hour in the EU was around 80 percent of the US level. - Over the past three decades, despite access to similar frontier technologies, labor productivity grew much more slowly in Europe than in the US. - Small enterprises dominate Europe’s production structure and their scale-up potential is often stymied by regulatory and financial constraints. ### Macroeconomic and policy implications - Faster productivity growth in the EU would yield additional resources for: sustaining Europe’s social model and intergenerational social contract; enabling transformative investments in the clean energy and digital transitions; strengthening defense capabilities; and improving debt service capacity. - Stronger productivity can improve profitability, incentivize more investment, and support job creation and social cohesion. - Illustrative simulation results presented in the paper indicate: - Over the medium- to long-term, EU GDP level could be about 3 percent higher than in the baseline. - Potential growth of the EU economy is projected at just above 1 percent. - Individual member states’ GDP levels could increase relative to baseline in a range of 2-5 percent over 10 years. --- ### Binding Constraints on Cross-Border Scale Up ### Conceptual basis - Stronger productivity growth emerges from diffusion of new technologies and reallocation of capital and labor to more productive firms, often via scale-up of younger and smaller firms. - Structural transformation requires: an enabling regulatory environment, easy access to finance, labor mobility, and affordable, reliable energy. ### Identified binding constraints - Fragmented regulation. - Inefficient and fragmented financial intermediation. - Insufficient labor mobility. - Fragmented energy system. --- ### Constraint 1: Regulations ### Core problem - Fragmented regulations lower predictability and increase transaction costs for firms seeking to scale up across borders. - 60 percent of EU exporters report the need to comply with different standards and consumer protection rules across member states. ### Institutional elements - The EU legislative framework operates under the principles of conferral, proportionality, and subsidiarity. - Share of EU-level regulations in the total ranges from 20 to 80 percent, depending on the area. - Shared competence between EU and member states often results in overlapping and inconsistent regulations. - “Gold-plating” and varying national transposition and enforcement contribute to fragmentation. - OECD (2022) reported that around 90 percent of EU countries had only partially implemented international regulatory co-operation policies. ### Effects on firms and trade - Firms must comply with multiple differing versions of legislation; variations in labeling and certification increase uncertainty and operational costs. - Fragmentation increases administrative burdens and deters cross-border scale up, reducing demand for risk capital and investable projects. - Since the start of the single market: - Trade costs for goods have declined by an average of 20 percent. - Trade costs for services have declined by only 7 percent. - Remaining trade barriers within the EU are estimated at a tariff-equivalent of 44 percent for goods and 110 percent for services. - Complex public procurement procedures and regulations in sectors like construction deter market entry across borders. - Fragmentation can lead firms to remain small; evidence points to reduced innovation responses around size thresholds tied to labor regulations. --- ### Constraint 2: Finance ### Core problem - Europe’s financial system is largely bank- and nationally-based and exhibits a high degree of home bias. - Capital markets remain relatively shallow despite plentiful savings and de jure international financial integration. ### Structural features and implications - Bank-dominated systems mobilize funding from national retail depositors and are not well suited for financing risky ventures and young firms that lack tangible collateral. - National fragmentation of the EU financial system, including payments systems, imposes barriers on productive firms seeking to scale up and expand across borders. --- *Source: IMF Working Paper — Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market (Introduction).* ### 2.1 percent in domestic stocks; if such investment is counted as domestic investment (as done in the literature), then e ### Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market ### Capital markets depth, fragmentation, and home bias - Findings and statistics: - EU households hold one-third of their financial assets in cash and bank deposits, compared with only one-tenth in the US. - Only 24 percent of respondents to a 2023 Eurobarometer Survey during 2021-23 had an investment product (funds, stocks or bonds). - 22 percent of respondents had a private pension or retirement product. - If EU households were to increase their ratio of deposits to financial assets to a level at par with that of US households, up to €8 trillion ($8.4 trillion) could be available for long-term, market-based investment (Lagarde 2024). - Assets held in private pension funds and insurance companies collectively amount to some $11.9 trillion in the EU, about a quarter of the US’ roughly $42.5 trillion (Arnold and others 2024). - EU pension and insurance funds allocate just 0.02 percent of total assets to VC, while US pension and insurance funds allocate 0.12 percent to VC (IMF staff calculation based on PitchBook and OECD data 2023). - ESMA (2023) finds EU retail investors pay about 60 percent more in fees when investing in mutual funds than their US counterparts do. - EIOPA’s 2024 Eurobarometer survey reveals that only 20 percent of EU citizens participate in an occupational pension scheme (EIOPA 2024c). - Effects: - Fragmentation of capital markets and home bias: on average almost half of EU insurers’ EU equity holdings are in firms based in the insurer’s home country (60 percent in Spain; 70–75 percent in Germany, the Netherlands, and Austria; and 80 percent in France). - Fragmentation limits depth and liquidity of the EU equity markets, hurts valuations and attractiveness of IPOs, and makes scale-up financing more difficult (Adilbish and others 2025; Schnabel 2024; EIB 2024b). - Non-EU, particularly US investors, play an important role in financing the scale-up phase of EU companies (Arampatzi and others 2025; Böninghausen and others (forthcoming)). - EIB (2024b) finds that by age ten, European scale-ups raise 50 percent less capital than their San Francisco peers. - The upshot: promising scale-ups often relocate and/or list in the US, causing loss of knowledge spillovers and negative implications for EU productivity; Draghi (2024) observation: “...there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while in the US all six companies with a valuation above EUR 1 trillion have been created over this period.” ### Retail payments segmentation - Findings and effects: - Retail payments systems in Europe are largely segmented within national boundaries, inflicting relatively high private costs of retail payments for both domestic and cross-border transactions, with significant variation across countries (ECB 2022, 2024). - High cost of retail payments increases transaction costs for cross-border services and discourages small firms from setting up operations across borders, contributing to firms relocating or listing abroad. ### Constraint 3 — Labor: limited EU labor mobility and barriers - Key statistics: - On average, less than 4 percent of the working-age population are nationals of other EU member states; variation: less than 1 percent in several CESEE countries including Poland, Hungary, Romania; around 10 percent in Cyprus, Austria, Malta, Belgium and Ireland; and 40 percent in Luxembourg (Figure 4). - About 5,400 professions covering 22 percent of the EU workforce are subject to regulations across member states (Letta 2024; Ebeke and others 2019). - Only 6 percent of workers who moved within the EU between 2017-2019 used the systems for recognizing professional qualifications (ECA 2024). - European Parliament (2024) noted average house prices in the EU increased by 48 percent during 2015-23 and nearly 11 percent of households in cities and 7 percent in rural areas face housing costs exceeding 40 percent of their disposable incomes. - Elements and barriers: - Language barriers limit job opportunities and integration, especially in sectors where communication or specialized knowledge is critical (e.g., jobs related to venture capital investment). - Recognition of professional qualifications: Directive on recognition applies, but only a small share use recognition systems; gold-plating and varying national requirements delay or impede recognition. - Social security and pension portability: Regulation allows only one social security scheme at any time and calls for more effective coordination; transfer/export of occupational pension rights remains problematic due to heterogeneity of national systems (Directive 2014/50/EU left transfer improvements to member states). - Housing affordability and shortages in metropolitan areas deter relocation; restrictive land-use policies and insufficient incentives for new construction compound shortages. - Effects: - Survey evidence: availability of staff with the right skills is a major obstacle to investment for about half of EIB survey respondents (EIB 2024a); this is lower than the 2018 result where nearly 80 percent of firms reported skills as an obstacle. - Labor market frictions reduce mobility, aggravate skills mismatch, and hinder firm investment and scale-up. - Specific sectoral constraints: truck drivers and healthcare workers face varying wage standards and social legislation that complicate cross-border mobility. ### Constraint 4 — Energy: fragmentation, price volatility, and investment impact - Findings and statistics: - The energy crisis exposed three weaknesses: (i) overreliance on imported fossil fuels; (ii) uneven vulnerabilities across countries; (iii) fragmentation of the internal energy market and interconnection (Kammer 2025). - Over 2023-24 the median wholesale electricity price across EU countries doubled relative to the pre-pandemic level and electricity price dispersion within the EU tripled. - Electricity price volatility over time and across hubs remains more than three times its pre-pandemic average. - Simulation: if there had been no cross-border trade at all, volatility could be more than five times the observed level (Figure 6). - Elements: - Energy policy remains a national prerogative; EU treaties leave the choice of aggregate energy mix to national governments. - Member states differ in energy intensity, renewable generation potential, and financing costs, creating uneven incentives for integration. - Network externalities are not internalized due to fragmented institutional setup; integrated energy approach would deliver long-term gains in resilience, supply security, and lower prices (Dolphin and others 2024). - Effects: - High and volatile energy prices deter investment, especially in fixed capital and R&D; firms in energy-intensive sectors and those with financial constraints are more susceptible (Longaric and others 2024). - 77 percent of European firms view high energy costs as a significant barrier to investment, compared to 68 percent of U.S. firms (EIB 2024 annual survey). - Net share planning to increase investment dropped to 7 percent for 2024 from 14 percent in 2023. ### Actionable priorities — overview - Diagnosis: Four key binding constraints on cross-border scale up in the EU—financial fragmentation, shallow capital markets and home bias, limited labor mobility, and energy market fragmentation—require EU-level reforms to deepen the single market. - Objective: Identify 10 actionable priorities; highlighted here are priorities focused on regulatory fragmentation and capital markets integration. ### Reducing regulatory fragmentation — two priorities - Action 1. Introduce a 28th regime with harmonized legal rules for areas key to firms’ formation, operation and dissolution. - Purpose: voluntary EU-wide legal framework to facilitate firm expansion without navigating divergent national regulations. - Business Code would harmonize: corporate and securities law (formation), accounting rules (operation), and insolvency procedures and courts (dissolution). - Critical aspects: (i) a uniform company law framework; (ii) a standardized investment procedure (examples cited: French BSA Air or US SAFE); (iii) unified accounting standards and insolvency procedures, with a single regime applied uniformly and dealt with by a specialized court/judge in the country of incorporation. - Implementation notes: divergent national frameworks would continue to apply in other areas; “coalition of willing” approaches (enhanced cooperation or intergovernmental agreement) could increase chances of success (Arampatzi and others 2025). - Risks and limitations: complex adoption alongside national regimes; the unified regime cannot be as exhaustive as national regimes; national rules may still be needed in some cases. - Rationale: would reduce compliance costs, legal uncertainty, and barriers that deter cross-border scale up and venture capital investment. - Action 2. For new rules, prioritize fully harmonized EU-level legislation and, for existing rules, simplify, consolidate and codify. - Prioritizing regulations (over directives) where allowed by the dual legislation framework to ensure direct applicability and uniformity. - Where directives are required, strengthen enforcement to prevent gold-plating and ensure uniform transposition. - Conduct a horizontal review of EU-level regulations to identify overlapping rules and areas for simplification, consolidation, and codification. - Expedite implementation of the “Once-Only Principle” to reduce administrative burdens by requiring citizens and businesses to provide data to public authorities only once. - Complement EU-level actions with national whole-of-government approaches and digital tools to streamline regulatory processes and improve transparency. ### Advancing the Capital Markets Union (CMU) — targeted actions - Strategic orientation: - Move away from a bank-dominated, mostly national-based financial system where savings remain silo-ed in low-yielding deposits toward a system that supports risk-taking, scale up, and better returns on savings. - A CMU anchored by a permanent European safe asset could provide a benchmark yield curve, enable better pricing of risky financial products, and help diversify bank and non-bank exposure (ECB 2023a). - Action 3. Expand the pool of capital. - Reduce transaction costs and incentivize EU households to rebalance away from bank deposits toward capital markets to increase the pool of long-term capital available to innovative scale-ups. - Implement automatic enrollment in voluntary occupational pension schemes to increase participation rates (experience in member states cited). - Improve financial literacy: 2023 European Commission survey shows on average 52 percent of respondents are financially knowledgeable; education programs and user-friendly digital platforms should improve participation. - Action 4. Channel saving to early-stage, risky assets through increasing venture capital investment. - Current allocations: 0.02 percent of total assets to VC by EU pension and insurance funds vs. 0.12 percent in the US. - Aimed target: an increase to about half of the level of VC investments of US pension funds and investment funds (in US dollar terms) would transform Europe’s VC ecosystem. - Measures: public initiatives (national and EU promotional banks) that crowd in institutional investors; scale up European Investment Fund resources and set up a sizable fund-of-funds aimed at institutional investors to invest in large (>€500 million) pan-EU focused VC funds. - Review regulatory constraints (including Solvency II changes and forthcoming Delegated Act) and national quantitative limits that may unduly constrain investments in private equity and VC. - Action 5. Allow more efficient cross-border allocation through more integrated markets. - Offer saving products that provide low-cost options for savers to invest across the EU, drawing on national best practices. - Revise and make ambitious improvements to the Pan-European Personal Pension Product (PEPP) Regulation to increase attractiveness of private pension products for European retail investors. - Accelerate adoption of the FASTER Directive addressing excess withholding taxes (deadline for national transposition is 2030). - The proposed digital euro could reduce segmentation of retail payment systems and lower cross-border commerce obstacles. - Strengthen ESMA’s institutional and governance arrangements for supervision, widen supervisory powers, and ensure a sustainable funding framework to support regulatory and supervisory convergence. *Source: IMF Working Papers — Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market* ### Box 1. Need for a Review of Pan-European Personal Pension Product Regulation (PEPP) ### Box 1. Need for a Review of Pan-European Personal Pension Product Regulation (PEPP) ### Objective - Ensure that the PEPP deliver more competition, economies of scale, lower fees and ultimately higher returns for retail investors by reviewing the framework along specific lines. ### Recommended reforms and rationale - Expanding the PEPP to occupational pensions. - Rationale: Allowing tax-efficient employer contributions alongside personal contributions would increase the appeal of the product, exploiting the potential scale and lowering relative costs for suppliers. - Evidence: An EIOPA staff paper from November 2024 (EIOPA 2024a) considers this expansion and notes similar products have been successful in France and New Zealand. - Equalizing taxation to that of national pension products. - Finding: A 2024 discussion paper by the EIOPA Occupational Pensions Stakeholder Group (EIOPA 2024b) found that PEPP products do not receive equal tax treatment relative to other pension products. - Recommendation: Align PEPP tax treatment in the jurisdiction it is offered to that of national pension products to remove a key disadvantage against PEPPs. - Constraint: Full harmonization across member states would be challenging because taxation is a national prerogative. - Equalizing regulatory treatment to that of national pension products. - Finding: Many countries do not allow savers to switch between national personal pension products (PPP) and PEPPs, reducing PEPP competitiveness (EIOPA 2024b). - Recommendation: Ensure regulatory treatment allows switching and comparable regulatory conditions between PEPPs and national PPPs. - Review of existing cap on fees. - Current rule: The PEEP regulation caps fees and costs at 1 percent annually of assets under management for basic PEPP products. - Concern: EIOPA (2024a) argues the fee cap may hinder private sector participation in offering PEPPs in the short term given initial expenses (e.g., mandatory advice, onboarding) and lack of scale. - Recommendation: The EIOPA 2024b report suggests lifting the cap if clear evidence shows potential PEPP providers are restricted by current distributional channel costs beyond what the current fee cap covers. - Review of compartments for cross-border workers. - Issue: Requirement to manage sub-accounts across various member states with divergent accumulation and decumulation rules adds to PEPP expenses (EIOPA 2024a). - Recommendations: - Evaluate whether the sub-account requirement can be made optional, applicable throughout the lifetime of the PEPP product, to lower costs. - Enable holders to request sub-accounts (against a fee) when they plan to work abroad. - Ensure sub-accounts are accessible for temporary cross-border workers by clarifying the definition of “residence” (EIOPA 2024b). *Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025113-print-pdf.pdf* ### 0.19 percent of assets under management. The outcome of 0.19 percent of assets under management would ### wpiea2025113-print-pdf - 0.19 percent of assets under management. The outcome of 0.19 percent of assets under management would ### Venture Capital (VC) and Firm Creation - Scenario: Increase VC by raising the share of VC investment by pension and insurance funds to achieve an outcome of 0.19 percent of assets under management. - This outcome would equal about 50 percent of the level of US pension and insurance funds’ VC investments (in US dollar values). - Country-level assumption: countries with low VC catch up to the current level of the top three member states (Estonia, Denmark, and Sweden). - Implication: tripling VC at the EU level from a very low level (0.075 percent of GDP over 2021-2023) by 2035. - Transmission to firms and productivity: - Apply Mollica and Zingales (2007) coefficient: an increase of 10 percent in the volume of VC investment increases the total number of newly created firms by 2.5 percent. - Apply Gourio and others (2016) coefficient: a one-standard-deviation shock to the number of start-ups leads to an increase in TFP of about 0.09 percent after four years. - Modeled GDP impact in 10 years from increased VC investment: 0.9 (percent). ### Increasing Labor Mobility across the EU - Modeled policy outcome: Increased within-EU labor mobility as an immediate outcome from implementing Actions 6-8. - Assumption: 12 advanced EU countries (individually included in the model) on average receive additional immigrants from the rest of EU, resulting in a 2-percent increase of the labor supply during 2025-2035. - Caveat: The analysis is agnostic about the precise implementation of Actions 6-8; quantitative links between these actions and increased labor mobility are not well established in the literature. - Comparative context: Modeled increase (2 percent) is lower than documented peak interstate mobility in the US in the 1990s (3.5-4 percent of the labor force) documented by Kaplan and Schulhofer-Wohl (2015) and 3 percent during 2019-2022 documented by Bick and others (2024). - Distributional implication: If total EU labor force stays unchanged from the baseline, the rest of EU would experience additional net emigration. - Benefits in receiving countries: - Alleviates labor shortages. - Countries experiencing more labor shortages (based on rankings derived from ECB quarterly data as of the first quarter of 2025) would have higher increases in labor supply. - Skill matching and human capital: - Estimation informed by McGowan and Andrews (2015a; 2015b) using OECD PIAAC data: assume each country catches up with best practices on skill mismatches. - For countries not included in the analysis (e.g., Greece, Portugal, and Ireland), interpolation based on skills mismatch rankings (Guo and others 2022) is used. - Even emigration-origin countries are assumed to gradually improve skill matching, partly because better job prospects encourage more skills and higher education. - Modeled GDP impact in 10 years from enhanced labor mobility: 0.9 (percent). ### Integrating the Electricity Market and Energy Prices - Modeled policy outcome: Lower wholesale and retail electricity prices as an immediate outcome from implementing Actions 9-10. - Baseline: Using the average wholesale electricity price from January 2004 to March 2025 as the baseline. - Projection: Future prices projected to decline as market mechanisms become more efficient and cross-border energy sharing increases. - Country heterogeneity in price reductions: - Largest reductions assumed for countries with initially high electricity costs such as Ireland, Italy, and Greece. - Moderate reductions for Austria, Belgium, Germany, and the Netherlands. - Smaller reductions for countries with already relatively low prices such as Finland, Portugal, Spain, and Sweden. - Economic transmission: - Decline in wholesale electricity prices gradually translates into lower retail electricity prices for households and firms. - Lower energy expenses enhance household purchasing power and improve firms’ competitiveness, stimulating consumption, investment, and overall economic activity. - For energy importers, lower energy prices boost terms-of-trade, enabling cheaper imports to further boost consumption, investment and overall economic activity. - Modeled range of wholesale electricity price reductions: lowering electricity prices across EU arranging from a reduction of 3-23 percent. - Modeled GDP impact in 10 years from electricity market integration: 1.1 (percent). - Stylized assumption note: Country-level distribution of wholesale energy prices following greater interconnection is complex and might temporarily include higher prices in those with the lowest initial costs; simulations try to capture general improvement in price levels and lower volatility and better hedging against risks. ### Semi-structural Model (MUP-F and FSGM) and Transmission Channels - Modeling framework: Model-Updated Projection Framework (MUP-F) uses impulse response functions (IRFs) produced by the Flexible System of Global Models (FSGM), a semi-structural, multi-region model with a global commodity market. - Mapping of reforms into MUP-F parameters: - Adopting a high-quality insolvency regime: modeled as a permanent reduction in corporate risk premia → increases Tobin’s Q → incentivizes lending for capital accumulation → raises labor productivity, wages, and consumption. - Increasing VC investment: contributes to more firm creation → lowers funding costs for startups and scaleups → faster technology development and diffusion → boosts TFP and increases capital accumulation. - Improved labor mobility: positive labor supply shock to advanced economies; lowers labor supply in rest of EU relative to baseline; encourages investment in human capital and gradual improvement in skill matching. - Lower and more stable energy prices: encourage long-term investment; reduce household and firm energy expenses → boost consumption, investment, and competitiveness; improve terms-of-trade for energy importers. - Note on TFP feedbacks: The FSGM model does not assume feedback from higher investment or better labor allocation to higher TFP growth; thus decomposition may understate potential TFP gains. ### Simulation Results and Growth Accounting - Composite simulation result: Selected reforms in regulation, capital, labor, and energy would increase the GDP level in the EU relative to baseline over 10 years by around 3 percent. - Context: EU potential growth is projected to be just above 1 percent annually over this horizon. - Member state range: Individual member states’ output gains relative to baseline range from around 2 to 5 percent. - Persistence: Reforms can boost growth beyond the 10-year horizon, for instance if they successfully promote innovation. - Growth accounting decomposition: - Roughly 20 percent of the increase in the level of potential GDP is attributed to gains in TFP. - The remaining 80 percent is explained by factor accumulation—specifically, increased labor input and a larger capital stock from greater investment. - Upside and downside risks: - Upside: Better productivity improvements than assumed, reforms reinforcing each other, complementary national reforms lowering intra-EU trade barriers, higher investment embedding new technology. - Downside: Outdated measures of insolvency regime quality if reforms were implemented after 2022; incomplete energy market integration limiting reductions in energy price level and volatility. - Comparative estimate from related IMF staff work: - Baba and others (2023) estimate that reducing remaining barriers within the single market (analogous to reducing cost of trade and bilateral multinational production within the EU by 10 percent) would lead to welfare gains on the order of 7 percent of GDP. - Budina and others (2025) estimate that closing 50 percent of prioritized domestic policy gaps could add around 5 percent to GDP for advanced European economies and around 7 percent for CESEE economies in the medium term. ### Key Quantitative Assumptions and Results (from Table 1 and text) - Increase VC at EU level: tripling from 0.075 percent of GDP over 2021-2023 to higher levels by 2035. - VC-related GDP impact in 10 years: 0.9 (percent). - Adopt unified high-quality insolvency regime GDP impact in 10 years: 0.3 (percent). - Enhance within-EU labor mobility GDP impact in 10 years: 0.9 (percent). - Lower electricity prices GDP impact in 10 years: 1.1 (percent). - Aggregate simulated cumulative gains in potential output in 2035 compared to baseline: around 3 percent for the EU (with member-level Min and Max ranging approximately from 2 to 5 percent). ### Policy Implications and Recommended Priorities - Four binding constraints identified: fragmented regulations, inefficient financial intermediation, limited labor mobility, and a fragmented energy market. - Proposed priorities: - Regulatory harmonization (including adopting a unified high-quality insolvency regime and prioritizing fully harmonized EU-level legislation where appropriate). - Enhanced access to finance (expanding long-term capital and channeling savings to early-stage, risky assets through increased VC investment). - Improved labor mobility (modernize professional qualification recognition; strengthen social security coordination and portability of supplementary pension rights; promote portability of wage contracts; improve housing affordability and address language barriers). - Energy market integration (develop a coordinated EU strategy for the energy system transformation; streamline permitting processes). - Complementarity: EU-level actions should be complemented with growth-friendly domestic structural reforms tailored to member states’ circumstances to maximize impact. *Source: IMF staff estimates as presented in the IMF Working Paper "Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market."* ### References ### References — Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market (Working Paper No. WP/2025/113) ### Insolvency, firm entry/exit, and business dynamism - Adalet McGowan, Müge, Dan Andrews and Valentine Millot, 2017, Insolvency regimes, technology diffusion and productivity growth: Evidence from Firms in OECD Countries”, OECD Economics Department Working Papers, No. 1425, OECD Publishing, Paris. - André, Christophe, and Lilas Demmou, 2022, Enhancing insolvency frameworks to support economic renewal, OECD Economic Department Working Paper no 1738. - Neira, Julian, 2019, Bankruptcy and cross-country differences in productivity, Journal of Economic Behavior & Organization, Volume 157, January 2019, Pages 359-381. - Hallak, Issam, 2025, Harmonisation of insolvency laws: Economic perspectives, European Parliamentary Reserve Service, January 2025. ### Capital markets, venture capital, and scale-up finance - Arampatzi, Alexia-Styliani, Rebecca Christie, Johanne Evrard, Laura Parisi, Clement Rouveyrol, and Fons van Overbeek, 2025, Capital markets union: a deep dive; Five measures to foster a single market for capital, ECB Occasional Paper Series. - Arnol d, Nathaniel, Guillaume Claveres, and Jan Frie, 2024, Stepping up venture capital to finance innovation in Europe, IMF working paper, WP/24/146. - Böninghausen, Benjamin, Johanne Evrard, Zakaria Gati, Sofia Gori, Claudia Lambert, Daniel Legran, Wagner Eduardo Schuster, and Fons van Overbeek, forthcoming, Should we mind the gap? An assessment of the benefits of equity markets and policy implications for Europe’s capital markets union, European Central Bank, working paper, forthcoming. - Bhatia, Ashok Vir, Srobona Mitra, Anke Weber, Shekhar Aiyar, Luiza Antoun de Almeida, Cristina Cuervo, André Oliveira Santos, and Tryggvi Gudmundsson, 2019, A capital market union for Europe, IMF Staff Discussion Note 2019/07. - Darvas, Zsolt and Direk Schoenmaker, 2017, Institutional investors and home bias in Europe’s capital markets union, Bruegel working paper issue 02/2017. - Kraemer-Eis, Helmut, and Annalisa Croce, 2023, EIF VC Survey 2023: Market sentiment, scale-up financing and human capital. EIF Working Paper (No. 2023/93). - Lindner, Johannes, and Sebastian Mack, 2024, Capital markets union: Europe must stop beating around the bush, Hertie School Jacques Delors Centre, Policy Brief, July 11, 2024. - European Commission, 2025d, What is the capital markets union? (Website). ### Payments, digital euro, and retail payment costs - Bank for International Settlements, 2021, CBDCs: An Opportunity for the Monetary System, BIS Annual Report, Chapter III. - European Central Bank, 2012, The social and private costs of retail payment instruments—A European perspective, ECB Occasional Paper No. 137. - European Central Bank, 2022, Costs of Retail Payments—An overview of recent national studies in Europe, Occasional Paper, December. - European Central Bank, 2023a, Europe needs to think bigger to build its capital markets union, August 30, 2023, ECB blog. - European Central Bank, 2023b, The Eurosystem’s retail payments strategy—Priorities for 2024 and beyond, November. - European Central Bank, 2024a, From Dependency to Autonomy: The Role of a Digital Euro in the European Payment Landscape, Introductory statement by Piero Cipollone, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 23 September. - European Central Bank, 2024b, FAQs on a Digital Euro. - European Central Bank, 2025a, The Role of the Digital Euro in Digital Payments and Finance Contribution to Bancaria by Piero Cipollone, Member of the Executive Board of the ECB, based on remarks at the Crypto Asset Lab Conference on 17 January 2025. - Financial Stability Board, 2024, Annual progress report on meeting the targets for cross-border payments, 2024 Report on Key Performance Indicators. - Norges Bank, 2022, Costs in the Norwegian Payments System 2020, Norges Bank Paper No. 3 2022. - Sveriges Riksbank, 2023, Cost of Payments in Sweden, Riksbank Studies No. 1 2023. ### Housing, rental markets, and affordability - Biljanovska, Nina, Chenxu Fu, and Deniz O Igan, 2023, Housing Affordability: A New Dataset, IMF Working Paper, no 2023/247. - De Boer, Rik, and Rosamaria Bitetti, 2014, A Revival of the Private Rental Sector of the Housing Market? 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Speech to the European Parliament on July 6, 1988. - Draghi, Mario, 2024, The future of European competitiveness, September 2024. - European Commission, 2025a, Communication from the Commission on a competitiveness compass for the EU. - European Commission, 2025c, Communication from the Commission on a union of skill. - European Parliament, 2024, The capital markets union – an extra feather to the EMU: Are capital markets important for monetary policy? 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New evidence from the investment fund sector, European Central Bank working paper series No. 2924. *References section from: Lifting Binding Constraints on Growth in Europe: Actionable Priorities to Deepen the Single Market — Working Paper No. WP/2025/113* --- _Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025113-print-pdf.pdf_