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The future of the European capital market

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First the good news: According to Bloomberg NEF, investments in the transition to clean energy increased by 17% in 2023, reaching USD 1.8 trillion. The bad news: Achieving net-zero CO2 emissions by 2050 will require USD 4.8 trillion per year from 2024 to 2030.

It is encouraging that there is sufficient capital available on the market to achieve this goal. However, given the current functioning of the European capital market, it seems questionable whether the EU will be able to raise its share of the USD 4.8 trillion needed for the net zero transformation .

  • The EU capital market is fragmented into 27 legislations , and further EU-wide regulations (such as CSRD reporting) will be added to the existing regulations. However, the Capital Markets Union proposed by former EU Commission President Jean-Claude Juncker in 2014 is not gaining the necessary momentum to become a reality.
  • Compared to the US capital market, the European capital market appears to be less efficient. While the EU has a higher general investment ratio (investment as a percentage of GDP) than the US, the US outperforms the EU in “productive” investment by 2% of GDP. These are assets that are used directly for economic production, such as equipment, intangible business capital and infrastructure, as opposed to non-productive assets such as residential buildings. In the case of investments in non-construction assets such as machinery, equipment and intellectual property, the gap in favor of the US widens to 3.8% of GDP.
  • The European banking system holds assets amounting to 300% of the EU’s GDP, compared with just 85% in the USA. However, the USA has a strong and active asset management industry.
  • Banks must demonstrate a core capital ratio for good reasons. Banks are therefore limited in their ability to assume risks compared to the asset management industry. And if banks are invested in the operating phase of energy transition projects, it takes a long time to generate capital for new investments.

These facts raise the question: Do we need a radical reform of the structure and functioning of the European capital market?

Themis Foresight is in the final stages of publishing a study on the future of the European capital market. This study examines alternatives to the current capital market structure. We invite you to stay tuned when we publish the study at the end of August.

In the meantime, we invite the knowledgeable and opinionated readers of our newsletter to comment on four possible scenarios for the European capital market. If you provide your e-mail address, you will receive our research results after completion of the study.

All four scenarios may seem illusory and “impossible” at first glance. But we have created the scenarios for a single purpose: What needs to be done to achieve the net-zero transformation of European industry? We have assumed that the net zero targets will be achieved in every scenario. We examine two central parameters of change:

  1. Will the European capital market remain as fragmented as before? Or will we achieve a capital markets union?
  2. Will banks continue to hold assets amounting to 300% of GDP? Or will the European asset management industry grow and take on more of the risks (and rewards) of net zero transformation?

We look forward to receiving well-founded comments from our readers, who can challenge, validate and modify the four scenarios currently proposed. The survey ends on July 14 at 11:59 pm.

We look forward to publishing the results of our study at the end of August – free of charge as usual.

Thank you for your participation!

And to all of you who are about to embark on a well-deserved summer vacation – enjoy it, recharge your batteries, there’s plenty to do. The future is what we make of it!

With best regards

Jan Berger & Carina Stöttner | ©  Themis Foresight GmbH