When Klarna chose New York over a European exchange for its stock market listing, it underscored a persistent challenge for Brussels: the continent's most dynamic companies frequently look across the Atlantic for deeper capital pools. As the European Union seeks to nurture its own AI champions, bolster its defence industry, and retain high-growth firms, a central question remains: why does a bloc with €37 trillion in household savings struggle to finance its own innovators?
The EU has renewed efforts to reform its capital markets, aiming to facilitate the free flow of capital across the bloc. Policymakers are pursuing incremental changes, including greater supervisory alignment, but a fully unified capital market remains distant. Member states continue to clash over technical details, slowing progress.
The Competitiveness Imperative
The pace of negotiations does not reflect the urgency expressed by Europe's political leadership. More integrated capital markets are seen as essential to compete globally with the US and China. Billions must be invested in strategic sectors such as artificial intelligence and defence amid geopolitical uncertainty, including wars and trade tensions. Lacking leadership in these areas means sacrificing geopolitical power and economic resilience.
European Commission President Ursula von der Leyen has championed this narrative, making competitiveness the cornerstone of her mandate. She tasked former European Central Bank President Mario Draghi with a report on EU competitiveness, which identified capital markets reform as a central recommendation. Presented in autumn 2024, the report estimates Europe needs €750 billion to €800 billion in investment annually—up to 5% of GDP—to remain globally competitive. “It's 'Do this,' or it's a slow agony,” Draghi warned, describing a prolonged erosion of Europe's economic position due to structural weaknesses like high energy costs and a fragmented single market.
The EU is focusing on two priorities: convincing households to invest a small fraction of the €37 trillion in savings, and integrating national financial markets to reduce barriers within the single market. This requires better access to capital markets and improved financial literacy. For example, greater participation can help individuals build retirement savings. At the same time, Brussels must advance the legislative framework known as the Savings and Investments Union (SIU) to enable these reforms.
Why US Markets Attract European Firms
Capital markets allow businesses to raise funds through equities or debt. However, scaling up in Europe remains challenging. Cross-border operations are costly, time-consuming, and involve significant administrative burdens because rules differ between member states, and even where they are harmonised, implementation varies. Consequently, European firms rely heavily on bank credit. “What we need to develop is a more diversified funding source,” Verena Ross, head of the European Securities and Markets Authority (ESMA), told Euronews.
Without diversification, businesses look elsewhere, particularly the US. “The US capital market benefits from a more consolidated supervisory approach. There are fewer layers of bureaucracy and red tape because the US uses a single currency,” said Rebecca Christie, senior fellow at Brussels-based think tank Bruegel. She also noted the advantages of a long-established federal system and the dollar's status as the world's dominant reserve currency. “Anybody who needs financing has an incentive to go to US markets because that's where the money is.”
A less fragmented European capital market would make more capital available for strategic investments and strengthen the euro's international role—another ambition of the current EU leadership amid the dollar's declining role. “We live in a global world and, particularly, capital markets are global by their nature. We also need to be attractive to overseas investors, whether they are American, Asian or from wherever they come, and make sure that Europe is a destination for that investment capital,” Ross added.
Why Is a Capital Markets Union So Hard to Achieve?
Despite broad agreement on the need for greater integration, strong disagreement persists over how to achieve it. The capital markets union legislation is part of the SIU package currently under negotiation. Key sticking points include harmonising insolvency laws, tax treatment, and securities supervision. Member states guard their national financial systems, fearing loss of control. The result is a slow, incremental process that frustrates businesses and investors alike.
For Europe to compete in AI and defence, it must overcome these hurdles. The AI infrastructure boom is driving market winners and losers, but without deeper capital markets, European firms may miss out. Similarly, shifts in listing strategies on the London Stock Exchange highlight the need for market depth over mere fundraising. The path forward requires political will and compromise—qualities that have been in short supply.
