IS EUROPE READY FOR A TRUE CAPITAL MARKETS UNION?

Sofia Giampa
13 minutes ago
14 min read

Europe’s paradox: rich in savings, short on investment

Europe’s economic debate has entered a decisive phase. Almost ten years after the launch of the Capital Markets Union (CMU) and a year after Mario Draghi’s competitiveness report, the same structural paradox remains: Europe is a high-saving continent that invests too little in itself.

Households across the EU hold more financial wealth than those in any other advanced economy, yet a disproportionate share remains in cash and deposits. Eurostat and EFAMA data show that household deposits rose from about €10.2 trillion in 2015 to nearly €14 trillion in 2022, lifting their share of household financial assets above 40%. These balances have often earned low or negative real returns, even as Europe faces an annual investment gap of €750–800 billion up to 2030 to deliver the green transition, digital infrastructure and rising defence needs – figures highlighted in Draghi’s report and the Commission’s Competitiveness Compass.

This mismatch is compounded by how Europeans invest. A CEPR study finds that households would have earned higher risk-adjusted returns over the past decade had they diversified more across EU borders. Yet portfolios remain overwhelmingly domestic, shaped by cultural preferences, low financial literacy and the tendency—documented by Smimou (2014)—for investors to retreat to home markets during periods of political uncertainty. The result is that vast pools of savings remain underutilised, limiting both household returns and the capital available to Europe’s firms.

The imbalance is external as well as internal. Christine Lagarde estimates that roughly €300 billion a year flows from the EU into US financial markets, meaning that Europe not only underinvests at home but also helps finance other regions’ growth more effectively than its own. Both the Draghi Competitiveness Report (2024) and Enrico Letta’s Single Market Report (2024) converge on the same diagnosis: unless Europe finds ways to channel its domestic savings into productive investment at scale, it will continue to lose ground in innovation, productivity and strategic autonomy.

Against this backdrop, Brussels has relaunched its most ambitious financial reform agenda. The original Capital Markets Union, introduced in 2015, was conceived as a way to integrate the EU’s fragmented capital markets. Its new incarnation, the Savings and Investments Union (SIU), goes a step further. The objective is not only to connect markets, but to mobilise the savings of households, pension funds and insurers behind Europe’s strategic priorities – while gradually reducing the dependence on bank loans and foreign capital.

The Structural Causes and Costs of Europe’s Fragmented Markets

Europe’s chronic underinvestment does not stem from a lack of savings, but from a system that cannot channel those savings efficiently across borders, preventing money from flowing to where it would be most productive. Three interlocking weaknesses drive this outcome: a shortage of long-term institutional capital, heavy reliance on domestic banks, and a financial architecture fragmented into 27 legal, tax and supervisory regimes.

The first and most structural constraint is the scarcity of “patient capital”. In most EU Member States, pension systems are dominated by pay-as-you-go arrangements, which transfer income from today’s workers to today’s retirees but do not accumulate financial assets. As a result, funded pension wealth in the EU amounts to only around 30% of GDP, compared with 100% in the UK and over 140% in the US (OECD; EC Pension Adequacy Report). This gap is key to the topic if we notice that funded pension schemes are the main suppliers of long-horizon capital: their predictable liabilities allow them to invest in illiquid, high-risk and high-return assets (like venture capital). Where such pension pools are small, as in most EU countries, venture-capital ecosystems remain thin. This is why European start-ups often manage to raise early seed funding but struggle to attract the large late-stage investments needed to scale — capital that, in the United States, is usually supplied by deep pension funds and major asset managers.

Second, Europe relies far more on bank credit than on capital markets. Roughly three-quarters of external corporate finance in the EU comes from banks, making firms more vulnerable when credit conditions tighten or when banks pull back lending to their home markets.

The third weakness is fragmentation. An IMF study (2019) estimates that regulatory differences within the Single Market impose implicit barriers equivalent to a 44% tariff in goods and over 110% in services. In finance, such divergences complicate insolvency outcomes, increase due-diligence costs and discourage cross-border investment. Venture-capital funds remain nationally bounded; 80% of European pension funds manage under €1 billion, and one-third under €25 million (Cleantech for Europe; EC data cited in the final draft). Market infrastructure is similarly splintered across dozens of exchanges, CSDs and clearing houses. For global investors, there is still no unified “European market”, but a grouping of smaller ones with distinct legal interpretations and supervisory practices

A fourth missing piece is retail investors. Eurobarometer surveys show very low levels of financial literacy across the Union (82% of citizens lack high financial literacy), while EU-commissioned studies highlight a fragmented retail environment: investment information is scattered, fees differ widely across Member States, and advisers frequently recommend in-house products rather than low-cost, diversified ones. In this landscape, keeping savings in deposits — even as inflation erodes real value — feels safer than navigating unfamiliar markets. This contributes to Europe’s vast pool of underused household wealth of about €10–14 trillion in deposits (Eurostat; EFAMA 2022).

Together, these frictions create a predictable chain reaction: shallow markets limit investment; limited investment prevents firms from scaling; and without large firms and deep markets, political incentives for integration remain weak. The consequence is structural: Europe continues to lose promising companies to deeper foreign markets, monetary transmission remains uneven across Member States, and Europe’s savings sit in low-yield accounts instead of financing the projects on which its competitiveness depends.

From Capital Markets Union (CMU) to Savings and Investments Union (SIU)

The Capital Markets Union (CMU) was launched in 2015 under the Juncker Commission with a clear objective: to ensure that capital could circulate across the EU as freely as goods and services do in the Single Market. The first CMU Action Plan set out more than thirty measures to build the basic “plumbing” of integration — notably simpler prospectus rules, EU labels for venture-capital and social-investment funds, a framework for simple and transparent securitisation, SME growth markets, crowdfunding rules and, eventually, a Pan-European Personal Pension Product (PEPP).

According to the Commission’s 2019 CMU factsheet, 12 of the 13 legislative initiatives had been politically agreed by the European Parliament and the Council by the end of the Juncker mandate, marking substantial but incomplete progress toward a unified capital market.

Yet despite these steps, the deeper obstacles proved persistent: insolvency regimes still diverged sharply, withholding-tax procedures for cross-border investors remained burdensome, and supervision continued to be split across 27 national authorities.

The pandemic and the 2022 energy shock reinforced this diagnosis. Emergency fiscal measures and bank lending helped firms survive the crisis, but both episodes highlighted that Europe’s recovery and long-term industrial transformation required far more equity and long-maturity capital than national banking systems alone could provide. This led the von der Leyen Commission to adopt a new CMU Action Plan in 2020, centred on sixteen measures grouped under three objectives: supporting a green, digital and inclusive recovery; making the EU a safer place to save and invest; and integrating national markets into a single market for capital.

Several flagship initiatives followed. The European Single Access Point (ESAP) — currently under development — will provide a central EU database for financial and sustainability information on companies, reducing search costs for investors and increasing the visibility of SMEs. The Listing Act, agreed in 2022, aims to make public markets more attractive for smaller issuers through simplified prospectus requirements, clearer market-abuse rules and more flexible share structures. In 2023, the Commission also proposed a directive to streamline withholding-tax relief procedures, which it estimates could save cross-border investors more than €5 billion annually once fully implemented.

Despite this activity, Europe still lacks the depth and cohesion of a genuine continental capital market. This is why the debate has increasingly shifted from the technical agenda of the “CMU” to the broader political ambition of a Savings and Investments Union (SIU). Whereas the CMU focused on infrastructure and regulatory convergence, the SIU turns to the demand side: how households save, how pension systems are structured, and how institutional investors can provide the long-term capital needed to finance Europe’s strategic priorities.

Inside the Savings and Investments Union

The Commission describes the SIU as a “horizontal enabler” – a financial framework meant to support all major EU priorities rather than a stand-alone policy. Its strategy rests on four connected pillars.

First, mobilising households. EU citizens hold roughly €10 trillion in bank deposits. Redirecting even a small fraction into capital markets would substantially increase the pool of finance available to European firms. To make this realistic, Brussels wants to develop EU-branded Savings and Investment Accounts: simple, diversified products with clear – ideally tax-favoured – treatment, inspired by the tax-advantaged investment accounts used in Sweden (ISK) and the UK (ISA), which simplify investment for households and offer favourable tax treatment. The aim is not to push everyone out of deposits, but to give savers straightforward alternatives if they are willing to accept some risk in exchange for better long-term returns. A coordinated push on financial literacy is meant to support this shift.

Second, strengthening institutional capital. Because most Member States rely mainly on pay-as-you-go public pensions, Europe has relatively small funded pension pillars. This limits the supply of “patient capital” for venture capital, infrastructure and high-growth firms. The SIU therefore urges countries to expand occupational and personal pension schemes – for example through auto-enrolment and better portability – and to review prudential rules that discourage insurers and pension funds from investing in equity or long-term assets. The goal is to build larger domestic investor bases so that European companies can scale at home instead of depending on foreign capital for late-stage financing.

Third, improving access to finance for firms. Many innovative SMEs obtain seed funding but face difficulties when they grow. Venture-capital funds are often small and nationally focused, and listing on public markets remains costly. Commission work cited in the CMU debate shows that the number of listed companies in the EU-27 has declined slightly since 2010, while new listings have become rarer and more expensive. Under the SIU, policy aims include lowering listing costs for smaller issuers, expanding non-bank channels, and using InvestEU – the EU programme that offers budget guarantees to the European Investment Bank and national promotional banks – to crowd in private investors in areas such as clean technology, digital infrastructure and defence.

Fourth, reducing fragmentation in rules and supervision. Even well-designed products cannot thrive if they must operate within 27 different legal and supervisory systems. The SIU therefore incorporates much of the unfinished CMU agenda: greater convergence in insolvency frameworks, more efficient withholding-tax procedures, and better-integrated trading, clearing and settlement systems. On supervision, policymakers are debating a stronger, more coordinated role for the European Securities and Markets Authority (ESMA) – particularly for large cross-border actors – as a way to ensure that a common rulebook is applied with a more consistent and centralized enforcement across Member States.

Taken together, the CMU and SIU amount to one project with two dimensions. One is technical: harmonising rules, building shared data platforms and upgrading financial infrastructure. The other is political and social: changing how Europeans save, how pension systems are organised, and how much control Member States are willing to share over core financial levers. How those questions are resolved will determine how close Europe can get to a genuine Capital Markets Union.

Banking Integration and Capital Markets

Alongside pension funds and venture capital, Europe’s bank-centred financial structure remains a structural constraint. Unlike the United States — where roughly three-quarters of external corporate finance comes from capital markets — about 75% of European corporate funding still comes from domestic banks (Eurofi & Vanguard, 2023). This means that when monetary conditions tighten or banks pull back behind national borders, access to credit contracts precisely for the firms that need long-term financing to grow.

ECB research (ECB Economic Bulletin, 2022) quantifies this asymmetry. Firms that rely partly on bond markets face smaller reductions in credit and investment during monetary tightening than those funded almost entirely by bank loans. Bond issuance helps soften credit contractions because firms can continue raising money from market investors even when banks pull back, making monetary policy work more evenly across the economy. A system with both deep bond markets and bank lending spreads risk more effectively than one centred overwhelmingly on loans.

For now, Europe is closer to the latter model. The continent still hosts hundreds of small, domestically focused banks, effective in serving local clients but too under-scaled to support large capital-market activities, such as underwriting large equity offerings, arranging major syndicated loans or support global M&A activity. On this front, the gap with the US is stark: the market capitalisation of J.P. Morgan alone exceeds that of the ten largest EU banks combined (Financial Times, March 2025). As a result, many large European deals (major IPOs, corporate bond issuances and M&A transaction) still rely on US investment banks, which weakens Europe’s financial autonomy and limits the development of its own capital-market infrastructure.

Cross-border consolidation is one way to address this. Larger, pan-European banks could diversify risks across countries, lower fixed costs through economies of scale and provide the investment-banking services needed for a real Capital Markets Union. They would also help reduce the “home bias” of today’s system, in which national banks tend to concentrate liquidity and lending domestically during crises. A genuinely European banking group, by contrast, would allocate capital according to economic opportunities across the Union rather than national reflexes.

Investment banks are a crucial part of this picture. They act as the bridge between traditional deposit-taking banks and capital markets: structuring bond issues, organising share offerings and supporting firms as they move from early-stage finance to global scale. Without well-capitalised intermediaries capable of performing these roles, Europe’s capital markets will remain shallow and fragmented, regardless of how many regulatory reforms are passed.

Draghi’s 2024 competitiveness report emphasises another structural problem: European banks are structurally less profitable than their US counterparts. Low profitability limits their ability to invest in technology, absorb shocks and sustain lending when conditions deteriorate. Strengthening bank balance sheets and allowing well-supervised consolidation is therefore not just about creating “champions”, but about making the financial system robust enough to support the volume of investment Europe needs.

Critics worry that larger banks could increase systemic risk or weaken local banking networks. The counter-argument is that a constellation of small, domestically oriented banks is itself fragile: these institutions are more vulnerable to asymmetric shocks and more likely to retreat inward during crises. A genuinely cross-border banking system would only work if it is underpinned by a completed Banking Union — meaning shared crisis-resolution tools and, eventually, a European Deposit Insurance Scheme (EDIS). These elements matter because they allow deposits to be protected in the same way across the euro area and give supervisors the confidence to let banks operate freely across borders. Mario Draghi and the ECB have repeatedly argued that without EDIS, banking integration remains incomplete and the costs of financial fragmentation persist.

Hence, the conclusion is straightforward: Europe cannot build deep, integrated capital markets while its banking system remains fragmented, under-scaled and unevenly profitable.

The Political Roadblock: Thinking European

If Europe’s financial weaknesses were purely technical — a shortage of investment products, shallow pension funds or divergent insolvency rules — the path to integration would be straightforward. The uncomfortable truth is political.

The political nature of the problem becomes clear once one examines how EU rules are made and applied. In finance, divergences in insolvency practices, tax procedures and supervisory approaches raise cross-border costs and reinforce home bias, even though the Single Market is supposed to eliminate such frictions. A large part of this fragmentation is produced by the legislative process itself. EU rules typically start simple at Commission level but become increasingly layered as they pass through the Council and Parliament. Member States and MEPs add carve-outs and special regimes to protect domestic industries, tax arrangements or legal traditions. The result is a rulebook that is both dense and insufficiently harmonised: a patchwork of narrowly tailored rules too complex to comply with, that vary in interpretation and enforcement, making it difficult for firms and investors to operate across borders.

One potential workaround under discussion is the so-called “28th regime”, referenced in Commission and Parliament debates. It is not an adopted law, but an optional EU-wide legal framework under discussion that companies could choose instead of navigating 27 national systems. It would not replace domestic corporate, tax or insolvency law but sit alongside them, offering a single European rulebook for cross-border activity. Such a framework would particularly benefit SMEs that cannot afford the legal and administrative burden of complying with multiple national regimes.

This institutional behaviour feeds a broader cycle of mistrust. As reported by the Financial Times (March 2025) and Brussels Signal (April 2024), smaller Member States such as Ireland and Luxembourg fear that deeper integration — especially proposals to expand the powers of the European Securities and Markets Authority (ESMA) to give it direct supervisory powers — would shift financial activity toward Paris or Frankfurt and erode national regulatory autonomy. France and Germany, by contrast, argue that without stronger central supervision of large cross-border infrastructures and asset managers, a true single market for capital cannot function.

Debate over risks reflects the same tensions. Critics caution that deeper financial integration could amplify contagion during crises or tilt the system in favour of countries with stronger financial sectors. Others warn that a shift toward market-based finance might, over time, nudge Europe toward more funded pension systems — raising fears of a gradual “privatisation” of welfare. A recent opinion article in the Financial Times (July 2025), written by an economist at SOAS University of London, warns that expanding funded pensions across Europe could gradually transfer control over essential services (such as housing, healthcare and elderly care) in the hands of large asset managers and private-equity funds. For these critics, the SIU is not just a financial reform, but a choice about who will finance Europe’s future and who will end up owning its assets. Supporters, on the ther hand, respond that the risks of inaction are far greater.

Behind these technical disagreements lies a political question about identity. National regulators are reluctant to cede authority; governments fear losing competitive advantages tied to tax regimes; domestic lobbies defend familiar systems. The instinct to remain a “big fish in a small pond” persists, even when the pond is shrinking. Yet, as the Commissioner argued, in financial markets what strengthens Europe strengthens each country within it. Larger, more liquid markets lower capital costs for firms, broaden opportunities for savers, and allow the EU to finance its strategic priorities with its own resources.

Europe’s debate on the CMU and SIU therefore turns on two unresolved issues. One is about scale: whether Europe can build the deep pools of long-term capital needed to match global competitors. The other refers to integration: whether Member States are willing to converge on supervision, tax procedures and legal frameworks so that this capital can flow freely. Both conditions are essential; both require political choices that governments have so far been reluctant to make.

If Europe wants a genuine Savings and Investments Union, it must confront that political reality. The CMU promises efficiency gains that only integration can deliver. But those gains depend on structural reforms that few governments have yet been willing to embrace. Europe already has the money, the companies, and a market of 450 million people. What remains is the question at the heart of its economic future: is it prepared to think — and act — as one?

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