Andrea Dugo / Feb 2026
Image: Shutterstock
Europe faces a striking paradox. It is one of the richest regions in the world, with households that save more than almost any others. Yet it consistently fails to produce the global technology champions and high-growth firms its economic weight should support.
The reason is not a lack of capital, but a failure to channel it into growing and innovative firms. This misallocation, more than any shortage of resources, lies at the core of Europe’s competitiveness problem. As we have shown in a recent ECIPE report, European households allocate nearly 70 per cent of their wealth to real estate, compared with less than 40 per cent in the US. Even when they invest in financial assets, Europeans overwhelmingly favour low-risk instruments such as deposits over equity. This conservative allocation deprives firms of the patient, risk-tolerant capital needed to innovate, scale and compete globally.
The consequences are visible across Europe’s financial system. European companies remain far more dependent on bank loans than their peers elsewhere. Nearly half of corporate financing in the EU comes from bank lending. In the US, the figure is closer to one-fifth. Banks play a vital role, but they are ill-suited to financing innovation. Their business model prioritises collateral, predictability and downside protection. Innovation requires the opposite: capital willing to accept uncertainty in exchange for future growth.
Deep equity markets and venture capital ecosystems fulfil that function. They provide flexible financing, distribute risk more efficiently and enable firms to scale rapidly. They also create powerful feedback loops. Venture capitalists invest when credible exit routes exist. Entrepreneurs take risks when funding is accessible. Investors allocate capital when regulatory and tax systems reward long-term investment rather than penalise it.
Europe struggles on all three fronts.
The problem is often portrayed as a failure of European integration. Yet the evidence suggests otherwise. The EU has spent more than a decade pursuing the Capital Markets Union, with modest results. The real divide is not between Europe as a whole and elsewhere, but within Europe itself – between countries that have successfully developed capital markets and those that have not.
Some European economies have already built world-class capital markets. Countries such as Sweden, Denmark and the Netherlands demonstrate that Europe’s constraints are neither structural nor cultural. They are policy choices.
Sweden offers a particularly striking example. Pension assets exceed 100 per cent of GDP, providing a vast reservoir of long-term investment capital. Swedish households actively participate in financial markets, supported by simple and tax-efficient investment accounts. A well-functioning junior stock exchange offers smaller companies access to capital and provides investors with opportunities to fund emerging firms. The result is that Sweden now produces more billion-dollar technology companies per capita than almost any other country.
These outcomes were not accidental. They reflect deliberate policy frameworks that encourage saving, investment and participation in capital markets.
Elsewhere in Europe, policy often works in the opposite direction. Tax systems favour property ownership over financial investment. Pension systems rely heavily on pay-as-you-go models rather than funded schemes that accumulate investable capital. Regulatory complexity raises the cost of listing and investing. These distortions do not prevent investment entirely, but they tilt the system towards safety and away from growth.
The scale of the opportunity is enormous. If European households allocated their savings in the same proportions as American households, equity investment could more than triple. But even matching the allocation patterns of Dutch households would increase equity investment by roughly 77 per cent. Such shifts would materially deepen capital markets, accelerate innovation and strengthen Europe’s corporate landscape.
Europe’s competitiveness debate has increasingly focused on public spending, industrial policy and strategic autonomy. These discussions have their place. But they risk overlooking a more fundamental truth: Europe already possesses the financial resources required to compete globally. The challenge is not to create capital, but to mobilise it.
Achieving this will require reforms at both European and national level, though the most decisive changes must occur domestically. Pension systems need larger funded components. Tax policies must stop privileging property over productive investment. Capital market regulation must reduce the costs and complexity of raising equity. Investment frameworks must make participation simpler and more attractive for households.
Capital markets are not abstract financial constructs. They are the transmission mechanism that converts savings into innovation, productivity and growth.
Until Europe strengthens that mechanism, its competitiveness problem will persist – not because it lacks capital, but because it fails to put it to work.
