A sense of disquiet is sweeping over the old continent. Innovative, low-cost Chinese producers are taking on Europe’s venerable industries and unsettling its policymakers. Europe has played only a bit-part in the tech revolution: the market value of America’s “magnificent seven” tech giants is about the same as that of the combined stockmarket capitalisation of the EU’s 27 members. In an interview with us last week, President Emmanuel Macron offered his own diagnosis. There can be no great power without economic prosperity and technological sovereignty, but “Europe does not produce enough wealth per capita.” It must become an attractive place to invest and innovate. This requires vast amounts of capital—and a well-oiled financial system that channels savings to promising investment opportunities across the continent.
The trouble is that European finance remains inefficient and bound by national borders. Pressing ahead with banking and capital-market reforms is thus more important than ever.
A decade ago European banking was on its knees. The sovereign-debt crisis in the south exposed an infernal doom loop. Because banks held a lot of sovereign debt and governments had to bail out banks in difficulty, trouble at one infected the other. Lenders were unprofitable, unloved by investors and saddled with non-performing loans. Today those bad loans have been shed and profits have recovered. The share price of UniCredit, one of Italy’s largest lenders, has outperformed that of Meta this year. Big banks are now subject to European supervision and regulation, rather than a patchwork of national measures. Yet banking on the continent remains cumbersome and parochial.
Europe’s banking union, first proposed in 2012, remains incomplete, mainly because a common deposit-insurance scheme has yet to be set up. One result is that the doom loop retains its power. Another is that too little cross-border activity and consolidation takes place. Regulators fear that if a bank collapses, they will be on the hook for loans made to dodgy borrowers beyond their borders. Without a common deposit-insurance scheme, governments require banks to use ring-fencing regimes to hoard liquidity that could have been more profitably deployed elsewhere. The time to press on with such a scheme is surely now, when non-performing loans are low everywhere and even southern banks are in good health.
Banks are not the only source of finance. More must also be done to create a European capital market, which can help spread risks. National markets are underdeveloped: according to the imf, only 30% of companies’ financing comprises tradable securities in the euro area, compared with two-thirds in America. As a consequence, Europeans’ vast savings are locked up in bank deposits, small firms struggle to obtain finance and entrepreneurs bear too much risk. By one estimate, a shock of one percentage point to national GDP growth results in a 0.8-point fall in consumption in the eu, but only a 0.18-point fall in America, where the pain is shared by investors, creditors and the government. No wonder Americans are more go-getting.
Although a proposal for a European capital-markets union was put forward in 2015, not much has been achieved. That is because regulations touching things like insolvencies, tax and disclosure have to be harmonised for an investor to see no difference between a security in Greece and one in Germany. Compared with whacking tariffs on Chinese cars, this is neither eye-catching nor easy. It is the spinach of public policy.
Eat your greens
Tariffs cheat European consumers by raising the cost of otherwise good and cheap products. By comparison, financial reforms channel Europe’s large pot of savings into profitable investments. They should encourage innovation and make the economy more resilient, by spreading risk more widely. Europe rightly worries that it is falling behind as America and China charge ahead in the race for technological supremacy. But, as with the two superpowers, one of its main strengths is size. To keep up, Europe should make the most of it.
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