European savings must finance European growth

Stéphane Boujnah, CEO of Euronext, recently published this editorial piece on the integration of European capital markets and the need to harness European savings to finance European growth

In recent weeks, several initiatives have emerged that will serve to strengthen the integration of European capital markets. The Dutch banking and market supervisors, former Italian Prime Minister Enrico Letta, and former Governor of the Bank of France Christian Noyer have put forward concrete proposals to better drive European growth. At its latest meeting in April, the European Council embraced this ambition.

The Capital Markets Union, now renamed the "Union of Savings and Investments," is no longer a political orphan. Rather, it will be one of the pillars of the next European cycle, which will begin with the European elections on 9 June and the appointment of a new European Commission.

A consensus is finally emerging on the need to resolve a European paradox. European household savings amount to €35,500 billion, driven by one of the world’s highest savings rates at 13.3%. However, Europe exports much of these savings by purchasing foreign debt securities and relying on foreign resources to finance the equity of its economy. We therefore need to rethink completely the way in which savings and investments in Europe are connected.

Seven pillars

I see seven pillars emerging to build the Union of Savings and Investments in Europe:

1. Consolidate access to capital markets for mid-sized companies and tech firms;
2. Integrate clearing and settlement infrastructures;
3. Revive securitisation by supporting it with a genuine European platform;
4. Implement a set of identical rules for capital markets across Europe;
5. Create an effective single supervisory framework for major capital market players operating in multiple member states;
6. Transform the market liquidity framework to direct a much larger portion of European savings into the shares of listed European companies;
7. Create a real global competitiveness test to allow the consolidation of European markets, in order to create global leaders in the capital markets sector in Europe.

We need to rethink completely the way in which savings and investments in Europe are connected.

Powerful market infrastructures are essential

To achieve these transformations, we need powerful market infrastructures capable of scaling up. In under 25 years, Euronext has become a central element of the Capital Markets Union in Europe. Today, Euronext is ready to contribute actively to the new phase of capital market unification, by bringing its expertise in two areas.

First, in creating a single European access point for mid-sized companies and tech firms, in partnership with other exchanges that wish to engage in this project. This will provide companies with an integrated and efficient financing mechanism across the continent.

Second, to continue reducing the fragmentation of post-trade activities, by deepening the initiatives we have already implemented at Euronext, so that the unique European liquidity pool is supported by a simplified, streamlined, and fully integrated post-trade structure.

If we mobilise collectively, I am confident that we will be able to catch up with the United States in funding innovation. But two essential changes do not depend on European decisions and must be taken immediately by member states.

Directing savings towards equity investments 

First, we must eliminate all mechanisms that artificially divert long-term savings from equity investments to debt instruments. This means removing fiscal distortions for households and revisiting prudential ratios applicable to institutional investors. Increasing the share of European savings invested in equities will not only yield higher long-term returns, but will also support competitiveness, economic development and employment in Europe.

Funding retirement

Second, we must quickly enable the emergence of funded pension schemes. We cannot lament the gap between the United States and Europe in the proportion of individual investors in equity markets – 30% and 3% respectively – without considering that most households in the United States must invest in equities to secure their retirement, while most European households must rely on the hope that their fellow citizens will continue to pay taxes and social contributions to fund their retirement.

If we mobilise collectively, I am confident that we will be able to catch up with the United States in funding innovation.

A strong political leadership is essential to establish a Union of Savings and Investments in Europe. This union will heavily depend on national decisions taken by member states to direct savings towards listed companies, by creating the most suitable conditions for households and institutional investors.