European markets at a crossroads: Reform or lose competitiveness

This week, in a remarkable show of unity, 28 companies, including Siemens, Airbus, and Saab signed a pledge to increase their investments in Europe by 50 per cent, provided the EU implements reforms to strengthen Europe’s competitiveness. Europe now faces a unique opportunity to attract investment, and reforming capital markets is one concrete way to capitalise on it.

Since 1995, fragmented capital markets in Europe have contributed to the loss of almost eight billion euros in GDP, largely due to capital flight. Every year, €300 billion from European retail and institutional investors flows outside the EU because Europe’s fragmented regulatory landscape and overregulation continue to make it undesirable for investors. That money could fuel European growth, but instead it flows elsewhere. 

Europe knows it has a problem. Reporting by the European Central Bank points to onerous regulation and high energy costs as top burdens to business investment. Just this past May, a Business Europe poll found that 82% of respondents believe that EU attractiveness for investment has either deteriorated or remained unchanged over the past 12 months. 

The biggest hurdle? Overregulation

To maintain competitiveness, Europe must stop pursuing laws, like the Corporate Sustainability Due Diligence Directive (CS3D), that hinder growth. CS3D threatens to further harm Europe’s ability to attract business through high compliance costs, disincentives to expansion, and civil liability. Due diligence reporting requires significant labour, technology investment and training, while headcount thresholds that trigger CS3D compliance will dissuade companies from growing their workforce in the EU. The provision for civil suits also exposes companies to extreme legal risk. Companies, fearing these costs, are unlikely to put trust in European markets, only further hindering Europe’s goals for growth. A hindrance that Europe cannot afford.

Despite these challenges, a window of opportunity remains. Rising global instability and trade tensions mean investors are actively seeking stable, predictable markets. Yet to seize this chance – and compete with emerging markets in Asia offering high-growth tech companies and more affordable investment opportunities – the EU must make its markets more attractive to investors. 

First, regulation must shift to allow Europe’s long-term investors to take appropriate risk on European companies. With greater tolerance for risk, Europe can fund a range of venture-backed startups that can serve as IPO candidates in the coming years, driving deeper liquidity in European markets. Currently, 30% of private European startups valued at over $1 billion relocate to the United States once the market recognises their potential, and Europe loses value in that moment.

Second, Europe must focus on ensuring that businesses listed on European exchanges can flourish. As it stands, overregulation from laws like CS3D is shackling European companies’ ability to deliver value on financial markets, allowing global peers to make gains at their expense. 

Finally, Europe must accelerate efforts to integrate its capital markets. Both European Commission President Ursula von der Leyen and the 2024 Draghi report emphasised the urgent necessity for a Capital Markets Union. At a minimum, the EU needs to have greater consistency in key practices on listing authorities, listing venues and removal of tax related obstacles to cross-border investment. While these may be small steps initially, they advance the broader goal of integrating a cross-border marketplace.

Europe’s capital markets are rapidly losing their seat at the global table. The continent faces urgent challenges in energy and defence, but the long-term health of its financial markets is critical to sustaining competitiveness. It is time for the bloc and its leaders to shift their regulatory focus to promoting European capital market competitiveness, or risk losing investment, companies, and growth to other regions. 

Share this article: