Europe risks falling behind: Capital market reform blocked by bureaucracy

The European economy suffers from capital market fragmentation and bureaucracy, which hinders adequate financing for innovation and start-ups, said Ursula von der Leyen, President of the European Commission, yesterday in her speech at the World Economic Forum, which is taking place in Davos, Switzerland.

Ursula von der Leyen said: "European household savings are almost euro1.4 trillion, compared to just over euro800 billion in the US. But European companies are struggling to take advantage of this and raise the financing they need, because our internal capital market is fragmented. And this situation leads to a capital flight to third countries: euro300 billion of European household savings are invested abroad every year. This is a key problem that is hindering the growth of our technology start-ups and hindering the development of innovation in clean technologies. We do not lack capital. We lack an efficient capital market that can transform savings into investments, especially for early-stage technologies that have the potential to change the game."

That is why the head of the European Commission has proposed the establishment of a European Economic and Investment Union, which will address the shortcomings identified in recent years. The EU Executive's plan includes the introduction of common financial products at European level and the removal of national barriers that hinder the flow of investment within the Union. On paper, this seems like a logical solution, but implementation raises questions about the political will of the Member States and legislative coherence.

A major obstacle to achieving this ambitious vision is the political and economic fragmentation of the European Union. Each Member State has its own financial regulations, which reflect national interests and often run counter to the principle of a single market. The proposal for a "28th regulation", i.e. a single set of rules applicable throughout the EU, is welcome, but it raises questions about national sovereignty and the difficulties of harmonisation.

For example, countries with well-developed financial markets, such as Germany or France, could see this initiative as a threat to their financial autonomy. On the other hand, smaller or eastern European countries, which depend on foreign investment, could face difficulties in adapting their financial infrastructure to the new common standards. Although the initiative is intended to support the European economy as a whole, the risk of uneven implementation could create new discrepancies between member states.

• Different national regulations drive top entrepreneurs out of the EU

Ursula von der Leyen highlighted in the speech cited that one problem is the unnecessary bureaucracy existing in EU member states.

The President of the European Commission said: "Secondly, we need to make it much easier to do business across Europe. Too many top entrepreneurs are leaving the EU because it is easier to develop their companies elsewhere. And too many companies are holding back investments in Europe because of unnecessary bureaucracy. We need to act at all levels - continental, national and local. (...) We will launch a comprehensive simplification of our sustainable finance and due diligence rules, and thus create an enabling environment for our SMEs to expand their capacity to build, produce and innovate in Europe. At the moment, companies are dealing with 27 national laws. Instead, we will offer innovative companies to operate across the Union under a single set of rules. We call it the 28th regime. Company law, insolvency, labour law, taxation will have a single and simple regulatory framework in the European Union, and this will help remove barriers to expansion across Europe. Because continental scale is our greatest asset in a world of giants."

However, the problem is much more complex than the bureaucracy invoked by von der Leyen, because, according to economic experts present at the Davos Economic Forum, in the EU we are faced with the lack of a sufficiently dynamic entrepreneurial culture and a reluctance to assume financial risks. They stated in workshops held yesterday that European start-ups, especially those in the technology and clean energy fields, suffer from an ecosystem that does not provide them with sufficient resources to grow. While the US and China massively support their innovators through venture capital and public investment, Europe seems caught in a bureaucratic dilemma, in which the fear of failure paralyzes decisions. Without profound changes in the way start-ups are financed and supported, European talent will continue to migrate to more favorable markets, such as Silicon Valley, said economic experts at Davos.

• EU seeks private capital for energy investments

The EU Commission President also spoke about the energy transition, which she said is another pillar of Europe's economic future and a factor that generates huge pressures on its competitiveness. High energy prices continue to affect European households and businesses, even though dependence on Russia has been drastically reduced, to only 3%, according to the head of the Community Executive.

Von der Leyen said: "But freedom has come at a price. Households and businesses have faced skyrocketing energy prices, even though these rates have since started to fall. Our competitiveness depends on a return to low and stable energy prices. Clean energy is the answer in the medium term, because it is cheap, creates quality jobs and strengthens our energy independence. Europe currently generates more electricity from wind and solar than from all fossil fuels combined. But we still have a long way to go to deliver these benefits to businesses and people. Not only do we need to continue to diversify our energy supply and expand clean generation from wind and photovoltaics, but also from nuclear in some Member States. We will need to invest in cutting-edge clean energy technologies, (...) and mobilise more private capital to modernise our electricity grids and storage infrastructure. We need to remove any remaining barriers to our Energy Union. And we need to better connect our clean and low-carbon energy systems. All of this will be part of a new plan that we will present in February. It is time to complete our Energy Union too, so that clean energy can flow freely across our continent and bring down prices for all Europeans."

Von der Leyen's plan seems to meet the demands of energy companies that have been penalized in recent years by EU energy transition policies, while global competitors, such as companies from China or India, have benefited from more flexible regulations.