Market forces

Commentary by Karel Lannoo, CEO, Centre for European Policy Studies (CEPS)

An integrated European market is the only way European firms can truly support innovation and growth, and compete on the global stage.

A well-functioning, liquid and integrated capital market is a key pre-condition enabling European companies to emerge, prosper and become global players. It is well known that SMEs drive jobs and growth in the EU, but the extent to which capital markets are driving firms forward is less well known. I welcome this publication as it will do two things: first, feature concrete profiles of inspiring companies; enliven names of companies with persons, figures and cases; explain the origins and business models of successful firms; and demonstrate how an idea becomes a legend. Second, it indicates how crucial capital markets are to the growth of many of these firms.

As Europe is embarking on its Capital Markets Union programme, policy-makers should be aware that only a truly integrated market can make Europe and its firms competitive on a global scale. Today’s fragmented markets hamper fundraising by European firms and limit their growth potential. For a European-wide IPO or rights issues, for example, a company’s prospectus needs to be authorised by 28 different authorities in 28 different member states that have 28 different registers, none of which has a depth or breadth comparable to that found in the US capital market. Only an effective single market can do this.

"If a truly innovative European firm goes to the market today in search of capital, there is a good chance it will end up in the hands of a US corporate"

Some simple figures express more than a long article: the EU currently has 11 companies with a market capitalisation exceeding $100bn; the US has 41. Moreover, the average market capitalisation of these 11 EU firms is only about one-half that of US firms. Tesla, the US car manufacturer that was hardly known a few years ago, already has acquired a market capitalisation half the size of the centenarian Daimler. It has not made a single euro in profit yet, but it is extremely innovative and expanding at an astonishing speed.

It is obvious that EU capital markets need to go a long way before they are in a position to support innovation and growth in a manner and magnitude that is comparable to that found in the US. Or to say it differently, if a truly innovative European firm goes to the market today in search of capital, there is a good chance that it will end up in the hands of a US corporate that will drive its growth forward.

  • 11 EU companies have a market capitalisation over €100bn

But it is not only the markets that need to become more European and deeper. We also need to stimulate entrepreneurialism and foster a risk-taking culture to support Europe’s competitiveness. In too many European countries, the state is far too much at the centre of economic activity, with public spending levels accounting for about half of GDP, or higher, whereas it is 41% in the US. State spending is of course crucial to create the basic ingredients of a well-functioning market economy, such as governance, education and infrastructure. But if the reach of the state goes too far, when it becomes a major player in economic life, or regulates too many aspects of the market, it may stifle entrepreneurism and innovation. I hope this report also contributes to the discussion about the appropriate balance between what is the task of the state, and what is the task of the private sector, and the market. It certainly offers plenty of food for thought on what the market can do.