A version of this article was originally published on the World Economic Forum.
Europe confronts a staggering investment challenge. The Draghi report estimated that an additional €800 billion is needed from 2025 to 2030 for the continent to meet its ambitions in energy transition, digital transformation, and defense. More recent estimates have raised this figure to €1.2 trillion, reflecting intensified geopolitical instability.
Failure to meet these targets risks undermining Europe’s strategic autonomy. It would constrain long-term economic growth, allow other regions to advance by heavily investing in frontier technologies, and leave Europe exposed to persistently high energy prices. Without decisive action, a generation could be denied the opportunity to build wealth and fund dignified retirements.
Why Europe’s savings fail to reach the real economy
Europe holds deep capital pools. In 2023, European households saved a massive €37 trillion. Yet much of this wealth remains largely idle. About 32%of these assets were held in cash and bank deposits, more than double the 13%held by American households. Another 33%is held with pension funds and insurers, who — bound by resilience-focused regulations —favor low-risk, low-yielding bonds.
While prudent regulation has strengthened Europe’s financial stability, it has also limited investors' capacity to deploy capital. The ‘pipes’ connecting savers to funding channels and the real economy are clogged.
Without targeted recalibrations to align incentives and risk appetite — as seen in the United Kingdom and United States — Europe will struggle to broaden investor participation and scale capital markets. Crucially, mechanisms must be established to ensure capital flows efficiently, and risks are borne by those best equipped to manage them.
Five structural frictions in how Europe funds growth
To unlock this capital reservoir, it is vital to examine Europe’s ‘financing continuum’ — the channels that connect capital supply and demand. Each major channel currently faces structural frictions:
- Bank lending: Provides 85% of debt financing to European corporates compared to 45% in the US, but capacity is constrained. Unlike US banks, which free up lending capacity through securitization — packaging loans and selling them to investors — European banks hold loans to maturity. Regulatory constraints and risk aversion hinder funding for high-risk, long-term growth.
- Listed debt markets: Offer funding through bonds. Investment-grade bonds serve low-risk borrowers at low costs, while high-yield bonds fund riskier firms at higher costs. However, small and medium-sized enterprises face high barriers to these markets. Market fragmentation across multiple exchanges reduces liquidity and creates inefficiencies, preventing capital from flowing freely across borders.
- Private credit market: Fills gaps left by banks but lags significantly behind the US. Conservative regulations, such as Solvency II, limit insurers and pension funds from deploying large pools of long-term capital into this market.
- Equity markets: Perform well but remain fragmented across multiple exchanges. Historically low retail participation depresses valuations, and pushes capital toward the US. Many European firms choose US listings over fragmented local exchanges.
- Private equity and venture capital: Provide essential financing for high-risk innovation. Europe produces strong early-stage companies but lacks mechanisms to scale them. Regulatory barriers and the absence of a unified ‘exit market’ encourage startups to sell to US firms, draining Europe’s innovation potential and exporting future growth.
How Europe can reconnect savings with strategic investment
Closing the funding gap requires strengthening the financing continuum. Momentum is strong to improve Europe's competitiveness, but momentum alone is insufficient — it requires action. The public and private sectors must work together to fully and swiftly implement the European Savings and Investment Union (SIU) proposals.
Increasing retail participation in capital markets via savings and investment accounts and boosting occupational pension systems can redirect a portion of the €37 trillion in household savings from low-yield deposits toward more productive financing channels such as public equities. This will support Europe’s strategic autonomy, expand household wealth, and enable secure and dignified retirements.
National governments must also reduce market fragmentation among the 27 member states to enable capital to flow efficiently across borders toward where it is most needed. Member states should revive a transparent, high-quality securitization market. This revival will support the scale of the financial market, economic growth, and improved capital allocation toward Europe’s long-term infrastructure needs.
This approach does not force undue risk onto households but offers them the returns they deserve. When a teacher’s pension fund invests in a European wind farm, or a nurse’s investment plan includes exposure to European startups, citizens grow their wealth, and Europe secures its strategic autonomy.
Europe collectively has the capital to remain competitive with the world’s leading economies. The continent has the savings, innovation, and industrial base. What it lacks is a seamless connection between these elements. Fixing Europe’s financial plumbing is no longer a technical discussion for bankers — it is an urgent economic imperative.
Read the original piece here.