When Klarna chose New York over Europe for its stock market listing, it highlighted a challenge Brussels has been trying to solve for years: Europe’s fastest-growing companies often look across the Atlantic for deeper pools of capital.
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As the EU seeks to build its own AI champions, strengthen its defence industry and keep more high-growth companies raising money at home, one question remains: why does a bloc with €37tn in household savings still struggle to finance its own fastest-growing businesses?
Now the European Union has stepped up efforts to reform its capital markets, aiming to make capital flow more freely across the bloc.
Policymakers are pursuing incremental reforms, including greater supervisory alignment, but a fully unified capital market is likely to take many years, as member states struggle to agree on key technical details, slowing the process.
The competitiveness challenge
The current speed of negotiations does not reflect the urgency being expressed by the EU’s political leadership: Europe needs more integrated capital markets to compete globally with major powers such as the US and China.
To do so, billions need to be invested in strategic sectors such as AI and defence, amid intense geopolitical uncertainty, including wars and trade tensions.
Lacking strategic industrial and technological leadership means sacrificing geopolitical power and economic resilience, especially in a global landscape where dominance, or even survival, depends on control over resources and expertise.
This narrative has been championed by leading EU politicians, including European Commission President Ursula von der Leyen, whose goal of making Europe more competitive on the global stage has become the North Star of her political mandate.
For this reason, von der Leyen tasked former European Central Bank President and Italian Prime Minister Mario Draghi with preparing a report on EU competitiveness, which identified capital markets reform as one of its central recommendations.
Presented in autumn 2024, the report says Europe needs €750bn-€800bn in investment each year, equivalent to up to 5% of GDP, to fulfil its competitiveness goals and remain globally competitive.
“It’s ‘Do this,’ or it’s a slow agony,” Draghi warned in one of his best-known remarks. Draghi describes this “agony” as a prolonged and cumulative erosion of Europe’s economic position, driven by structural weaknesses such as high energy costs and a fragmented single market, which together make the continent less conducive to investment and innovation.
The EU is focusing on two priorities to unlock the potential of its capital markets.
The first is convincing households to invest, mobilising a small percentage of the estimated €37tn in savings. The second is integrating national financial markets across the EU to reduce barriers within the single market, making it easier for businesses to raise funding and for investors to put their money to work.
For this to happen, households need better access to capital markets, along with a better understanding of how to invest and the potential benefits involved. For example, greater participation in financial markets can help individuals build their retirement savings.
At the same time, Brussels must advance the legislative framework — known as the Savings and Investments Union (SIU) — to enable these reforms to take place.
Why do businesses find it easier to seek funding in the US?
Capital markets are marketplaces where individuals, institutions and governments buy and sell long-term financial instruments, such as equities or debt.
They offer businesses a way to raise funds and support their growth. However, scaling up in Europe remains challenging. Cross-border operations can be costly, time-consuming and involve significant administrative burdens. This is because rules differ between member states, and even where they are the same, their implementation may differ.
These are among the reasons why firms in Europe obtain most of their financing through bank credit.
“What we need to develop is a more diversified funding source,” the head of the European Securities and Markets Authority (ESMA), Verena Ross, told Euronews in an exclusive interview with Euronews Business editor Angela Barnes.
Without enough diversification, businesses look for other markets where funding is more readily available, such as 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,” Rebecca Christie, senior fellow at Brussels-based think tank Bruegel, told Euronews.
Christie also said the US benefits from having a long-established federal system and from the dollar’s status as the world’s dominant reserve currency, both of which reduce barriers and increase its attractiveness.
“Anybody who needs financing has an incentive to go to US markets because that’s where the money is,” she said.
A less fragmented European capital market would have far-reaching implications, including making more capital available for strategic investments and strengthening the euro’s international role as a global currency — another major 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 told Euronews.
Why is a capital markets union so hard to achieve?
Despite broad agreement that capital markets need greater integration, there is still strong disagreement over how to make it happen.
The capital markets union legislation forms part of the Savings and Investments Union (SIU), a package of legislative proposals currently under negotiation.
One of the key pieces of legislation aimed at harmonising capital markets is the Market Integration and Supervision Package, known as MISP.
Despite the intensification of talks on MISP in recent months, member states have yet to reach a common position, particularly on how to harmonise capital markets supervision.
Last spring, the six largest European economies — Germany, France, Spain, Italy, Poland and the Netherlands — made a proposal setting out how to centralise supervisory powers.
In particular, they propose transferring some supervisory powers to ESMA, but there is no consensus on whether to proceed, an EU diplomat told Euronews on condition of anonymity. Even among those who agree, there are differing views on how and over what timeframe this should be implemented.
“The problem with the integration of capital markets is not even a political one; it is more a national issue,” Aurore Lalucq, chair of the European Parliament’s Committee on Economic and Monetary Affairs, who played an important role in the legislation, told Euronews.
“I think there will be progress in supervision, but there are a lot of details that will be tough to negotiate due to very different perspectives,” Lalucq added, referring to the fact that member states have very different capital market cultures.
Klarna’s decision to look across the Atlantic for deeper capital markets illustrates the challenge Europe faces. While there is broad agreement that the bloc needs to mobilise more private investment, national interests continue to slow progress towards a truly unified capital market.
