Financial Market Reforms Could Lift Europe's Growth
IMF Blog, July 14, 2026
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Bibliographic details
- Authors: Luis Brando-Marques, Damien Capelle, Diego Cerdeiro, Rui-Mano
- Published: July 14, 2026
Key findings
- Integrating and deepening banking and venture capital markets would boost output by at least 3 percent.
- A moderate reform effort that reduces barriers to cross-border banking could raise European Union GDP by about 2 percent in the long term.
- Adding reforms to ease legal and tax-related impediments to cross-border venture capital investment, together with measures to expand long-term risk capital through pension and insurance reforms, could bring the estimated gain from financial reforms close to 3 percent.
- Combining financial and real economy (business dynamism and innovation) reforms can lift the long-term GDP gain into double digits.
- Europe’s considerable savings are compartmentalized within national borders, limiting connections to high-risk, high-return projects and constraining scale-up of young and innovative companies.
Barriers identified
- Differences in banking regulations across countries.
- Divergent safety nets, notably deposit insurance, that impede cross-border bank lending.
- Heterogeneous insolvency regimes across countries.
- Rules that limit provision of risk capital by pension funds and insurers.
- Legal and tax-related impediments to cross-border venture capital investment.
- Insufficient business dynamism and innovation that reduce the pool of projects with high potential returns.
Quantitative estimates and mechanisms
- About 2 percent long-term EU GDP gain from reducing barriers to cross-border banking, driven by:
- Better allocation of savings across countries and companies.
- Businesses being able to reach potential lenders, lowering funding costs.
- Close to 3 percent long-term EU GDP gain when banking reforms are complemented by:
- Easing legal and tax-related impediments to cross-border venture capital investment.
- Expanding long-term risk capital through pension and insurance reforms.
- At least 3 percent aggregate gain attributed to integrating and deepening banking and venture capital markets.
- Double-digit long-term GDP gains possible when financial reforms are combined with measures that improve business dynamism and innovation.
Policy recommendations (three fronts)
- Press ahead on the banking union:
- Reduce regulatory and institutional differences.
- Harmonize insolvency frameworks.
- Complete the financial safety net, including through a European deposit insurance scheme, to reduce adverse sovereign–bank feedback loops and support economic and financial resilience.
- Strengthen venture capital and equity financing:
- Expand the pool of long-term risk capital.
- Ease cross-border investment frictions for venture capital.
- Improve the business environment so newly available capital finds more attractive projects to finance:
- Improve the business environment for starting and growing new businesses.
- Invest in skills and support research and development to raise the pool of projects with high potential returns.
Interaction of finance and innovation
- Innovation and finance go together: reforms that create more promising companies will go further when Europe’s savings can flow freely to fund them.
- Cross-border investments (example cited: French startup Mistral AI’s financing round led by ASML) remain uncommon across Europe, illustrating the limits on scaling promising projects when savings are compartmentalized.
Luis Brandão-Marques, Damien Capelle, Diego Cerdeiro, Rui C. Mano; Chart of the Week, July 14, 2026 — IMF Staff Discussion Note team also comprises Adriano Fernandes, Alexandra Fotiou, Yueling Huang, Claire Li, Alberto Musso, Ese Onokpasa, Richard Varghese, and Maryam Vaziri.
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- Staff Discussion Note