{
  "title": "Europe’s Elusive Savings and Investment Union",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2025/06/europes-elusive-savings-and-investment-union-ravi-balakrishnan",
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  "summary": "An integrated capital market must be accompanied by regulatory reforms to attract substantial investment",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Europe has ample savings but not enough investment; a savings and investment union (SIU)—a pan-European financial market that mobilizes and makes savings available for investment across the European Union—is proposed as part of a long-term remedy.\n- A single financial market must offer attractive investment returns, requiring less red tape and uniform regulation across EU states to lower trade barriers.\n- The EU Capital Markets Union initiative launched in 2015 was politically contentious and showed little progress; renewed impetus followed reports in 2024 and the European Commission’s March 2025 SIU strategy.\n- The EU banking union, launched after the 2008 global financial crisis, remains incomplete and is a key obstacle to an SIU."
    },
    {
      "heading": "Fragmented capital market: findings",
      "content": "- About 80 percent of productive investment has historically come from the private sector.\n- Savings in Europe are kept largely in domestic economies; 80 percent are in bank deposits.\n- Banks do not normally lend deposits across national borders, contributing to pervasive “home bias” of savings and investment.\n- Europe’s low issuance of securitized assets reflects lack of uniform regulation and unnecessarily high capital charges; underlying assets in European securitized offerings are national and comprise largely residential mortgages.\n- Institutional holders (pension funds and insurance companies) limit holdings because of high capital charges imposed by the European Insurance and Occupational Pensions Authority.\n- Pensions are not portable across the EU when people take jobs in another member state, confining investment within national schemes.\n- Fragmentation results in substantial variation in borrowing costs for households and especially small and medium-sized businesses.\n- The relationship between bank funding costs and sovereign funding costs contributes to variability in borrowing costs because bank resolution is still largely national.\n- Variability in lending margins declined following the European Central Bank’s large-scale targeted liquidity provision, but is still higher than it was before the global financial crisis, even though the divergence in government bond yields has subsided.\n- Large US banks have more than 60 million customer accounts each—no European bank comes close—giving US banks economies of scale and product synergies that European banks largely lack.\n- Bank resolution remaining the responsibility of EU member states limits cross-border bank liquidity flows and the growth of pan-European savings and investment products.\n- Equity capital is more expensive in the EU than in the US, reflecting a much larger US market and Europe’s fragmented, largely national market.\n- Venture capital funds raise seven times more in the US than in the EU, according to IMF calculations.\n- The EU is home to less than 15 percent of start-ups valued at more than $1 billion (so-called unicorns).\n- According to the European Investment Bank (EIB), EU scale-up firms raise 50 percent less capital on average than their US counterparts in their first 10 years.\n- Stock market fragmentation makes IPOs in the EU less attractive than in the US, incentivizing many start-ups to move abroad for financing."
    },
    {
      "heading": "Harmonized regulation: findings and barriers",
      "content": "- Early designs for the Capital Markets Union included a common insolvency framework across all member states and an EU-issued safe asset; these remain largely on the drawing board.\n- Centralizing regulation with the European Securities and Market Authority (ESMA) as a single common regulator and setting common reporting requirements was planned, but progress has been slow as national regulators cede power only gradually.\n- Differences of opinion among member states persist despite renewed pushes following recent Commission communications and reports."
    },
    {
      "heading": "Expected returns and investment behavior",
      "content": "- An integrated financial market alone is unlikely to increase investment anywhere close to 5 percent of GDP per year—the shortfall identified by Draghi.\n- Availability of capital and dispersion in the cost of capital across the EU are constraints, but not necessarily the main impediments to investment.\n- Spreads on large firms’ borrowing are not significantly higher in the EU than in the US (see Chart 1 referenced in source).\n- Firms will invest more if they expect higher returns, which requires reforms and deregulation that expand their market.\n- Lack of uniform regulation in the EU single market prevents companies from scaling up by expanding into other EU markets and likely contributes to persistent growth divergence between the US and the EU, manifesting in lower rates of return on EU investments.\n- According to EIB surveys:\n  - 60 percent of EU exporters report they must comply with significantly different regulations across EU countries.\n  - 74 percent of innovators report they must comply with significantly different regulations across EU countries.\n  - The services sector is hit hardest.\n- 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.\n- EIB estimates the cost of dealing with regulatory compliance is 1.8 percent of sales on average (2.5 percent for small and medium enterprises).\n- By comparison, EU firms’ energy costs have been about 4 percent of sales.\n- The EU aims to reduce the reporting burden for all companies by 25 percent and by 35 percent for small and medium enterprises."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Completing the banking union and allowing more cross-border bank mergers and liquidity movement would help unlock pan-European savings products and investment instruments.\n- Harmonizing regulation and supervision across the EU—including withholding taxes, insolvency regimes, and reporting requirements—would reduce fragmentation and home bias.\n- Reforms and deregulation that expand firms’ market opportunities are essential to raise expected returns and thereby stimulate investment.\n- Simultaneous action on multiple fronts is required to generate a positive feedback loop: lower trade barriers and less red tape; higher rates of return; more unified financial regulation and supervision; and fewer impediments to cross-border movement of capital.\n- Political and legislative hurdles are high; most actions needed are at the member-state level where lingering disagreement remains.\n- Even with rapid SIU progress, increasing gross rates of return remains necessary for the EU to meet its growth and geopolitical challenges—advancing competitiveness and single market agendas quickly is key.\n\nRAVI BALAKRISHNAN and MAHMOOD PRADHAN, “Europe’s Elusive Savings and Investment Union,” F&D Magazine, June 2025.\n\n---\n\n Content in this bundle\n\n- Balakrishnan\n  - Balakrishnan (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Balakrishnan (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2025/06/europes-elusive-savings-and-investment-union-ravi-balakrishnan"
    }
  ],
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    "Authors: RAVI BALAKRISHNAN, MAHMOOD PRADHAN",
    "Published: June 2, 2025",
    "Europe has ample savings but not enough investment; a savings and investment union (SIU)—a pan-European financial market that mobilizes and makes savings available for investment across the European Union—is proposed as part of a long-term remedy.",
    "A single financial market must offer attractive investment returns, requiring less red tape and uniform regulation across EU states to lower trade barriers.",
    "The EU Capital Markets Union initiative launched in 2015 was politically contentious and showed little progress; renewed impetus followed reports in 2024 and the European Commission’s March 2025 SIU strategy.",
    "The EU banking union, launched after the 2008 global financial crisis, remains incomplete and is a key obstacle to an SIU.",
    "About 80 percent of productive investment has historically come from the private sector.",
    "Savings in Europe are kept largely in domestic economies; 80 percent are in bank deposits.",
    "Banks do not normally lend deposits across national borders, contributing to pervasive “home bias” of savings and investment.",
    "Europe’s low issuance of securitized assets reflects lack of uniform regulation and unnecessarily high capital charges; underlying assets in European securitized offerings are national and comprise largely residential mortgages.",
    "Institutional holders (pension funds and insurance companies) limit holdings because of high capital charges imposed by the European Insurance and Occupational Pensions Authority.",
    "Pensions are not portable across the EU when people take jobs in another member state, confining investment within national schemes.",
    "Fragmentation results in substantial variation in borrowing costs for households and especially small and medium-sized businesses.",
    "The relationship between bank funding costs and sovereign funding costs contributes to variability in borrowing costs because bank resolution is still largely national.",
    "Variability in lending margins declined following the European Central Bank’s large-scale targeted liquidity provision, but is still higher than it was before the global financial crisis, even though the divergence in government bond yields has subsided.",
    "Large US banks have more than 60 million customer accounts each—no European bank comes close—giving US banks economies of scale and product synergies that European banks largely lack.",
    "Bank resolution remaining the responsibility of EU member states limits cross-border bank liquidity flows and the growth of pan-European savings and investment products.",
    "Equity capital is more expensive in the EU than in the US, reflecting a much larger US market and Europe’s fragmented, largely national market.",
    "Venture capital funds raise seven times more in the US than in the EU, according to IMF calculations.",
    "The EU is home to less than 15 percent of start-ups valued at more than $1 billion (so-called unicorns).",
    "According to the European Investment Bank (EIB), EU scale-up firms raise 50 percent less capital on average than their US counterparts in their first 10 years.",
    "Stock market fragmentation makes IPOs in the EU less attractive than in the US, incentivizing many start-ups to move abroad for financing.",
    "Early designs for the Capital Markets Union included a common insolvency framework across all member states and an EU-issued safe asset; these remain largely on the drawing board.",
    "Centralizing regulation with the European Securities and Market Authority (ESMA) as a single common regulator and setting common reporting requirements was planned, but progress has been slow as national regulators cede power only gradually.",
    "Differences of opinion among member states persist despite renewed pushes following recent Commission communications and reports.",
    "An integrated financial market alone is unlikely to increase investment anywhere close to 5 percent of GDP per year—the shortfall identified by Draghi.",
    "Availability of capital and dispersion in the cost of capital across the EU are constraints, but not necessarily the main impediments to investment.",
    "Spreads on large firms’ borrowing are not significantly higher in the EU than in the US (see Chart 1 referenced in source).",
    "Firms will invest more if they expect higher returns, which requires reforms and deregulation that expand their market.",
    "Lack of uniform regulation in the EU single market prevents companies from scaling up by expanding into other EU markets and likely contributes to persistent growth divergence between the US and the EU, manifesting in lower rates of return on EU investments.",
    "According to EIB surveys:",
    "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.",
    "EIB estimates the cost of dealing with regulatory compliance is 1.8 percent of sales on average (2.5 percent for small and medium enterprises).",
    "By comparison, EU firms’ energy costs have been about 4 percent of sales.",
    "The EU aims to reduce the reporting burden for all companies by 25 percent and by 35 percent for small and medium enterprises.",
    "Completing the banking union and allowing more cross-border bank mergers and liquidity movement would help unlock pan-European savings products and investment instruments.",
    "Harmonizing regulation and supervision across the EU—including withholding taxes, insolvency regimes, and reporting requirements—would reduce fragmentation and home bias.",
    "Reforms and deregulation that expand firms’ market opportunities are essential to raise expected returns and thereby stimulate investment.",
    "Simultaneous action on multiple fronts is required to generate a positive feedback loop: lower trade barriers and less red tape; higher rates of return; more unified financial regulation and supervision; and fewer impediments to cross-border movement of capital.",
    "Political and legislative hurdles are high; most actions needed are at the member-state level where lingering disagreement remains.",
    "Even with rapid SIU progress, increasing gross rates of return remains necessary for the EU to meet its growth and geopolitical challenges—advancing competitiveness and single market agendas quickly is key.",
    "**Balakrishnan**"
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