David Harrison / Sep 2026
Image: Shutterstock
It is widely accepted that, for many reasons – including to counter a flood of exports from China - Europe needs much higher levels of investment.
When accepting this year’s Charlemagne Prize Mario Draghi pointed to the mounting requirements: “What was already estimated at around EUR 800 billion a year in additional strategic spending has, with the defence commitments of recent years, risen to almost EUR 1.2 trillion a year on average.” And international economic experts, reporting to the G7 Summit in France in June, recommended that Europe’s own best contribution to fixing rising global economic imbalances would be to tackle its persistently low levels of productive investment.
The private sector will need to play a big part in any investment push – something like two-thirds or three-quarters of the whole. And there are broadly three ways for companies to finance additional investment: using their own resources (retained earnings from profits); obtaining credit from banks; and obtaining equity capital from capital markets.
But on the first point, the OECD has reported weak private investment in many countries ever since the global financial crisis. Even with strong profitability and low financing costs, companies have been channelling a lower share of their retained earnings and borrowed funds into productive investment, and requiring persistently high rates of return, or hurdle rates, for any such investment. Elevated uncertainty appears to be weighing on their incentives to invest, encouraging a precautionary accumulation of cash.
A European programme to boost investment should therefore involve credible projects and a credible timescale to give companies the certainty they presently lack.
And on the second and third points, some further thinking is needed.
At present, there is very little cross-border banking in Europe, and comparatively little bank lending for constructive investment. The trauma of the global financial crisis has weighed on the former; while for the latter an economic study in 2014 (“The Great Mortgaging: Housing Finance, Crises and Business Cycles”) showed that in most developed countries lending for real estate has become the main activity. To quote from the authors, “The intermediation of household savings for productive investment in the business sector – the standard textbook role of the financial sector – constitutes only a minor share of the business of banking today, even though it was a central part of that business in the 19th and early 20th centuries.”
The answer is to treat banking as the interdependent and interconnected industry it undoubtedly is (one bank’s lending being another bank’s deposits) and use the conditional exemption under EU competition law which permits agreements and concerted practices between competitors provided that they contribute to improving the production or distribution of goods, or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit (TFEU Article 101 (3)). Investment projects, almost by definition, aim to do just these things, and so cooperation between competing banks – within and across borders in Europe – could be permitted to increase volumes of credit to finance them, including, for example, by pooling risk and information-sharing about likely rates of return and reasonable hurdle rates.
Guidelines explaining to banks and companies how the exemption would work in practice could be drawn up relatively easily, and give the legal certainty for higher levels of credit for investment by companies.
For more equity capital, a strategy of unifying Europe’s existing capital markets, and creating a bigger and better capital market, would make sense if the efficient market hypothesis were correct, and the prices of securities traded on capital markets always reflect all relevant information, so that investors and companies can rely on them when deciding what to invest in.
Unfortunately, securities prices fluctuate far from the one thing that matters, which is the actual yield of an investment over its whole life. In the United States, the spiritual home of the efficient market hypothesis, the volume of stock trading has increased over 4,000 times in the postwar period, from about 2 million shares per day in the 1950s to about 8.5 billion shares per day in the twenty-first century. During this same period levels of net investment (gross fixed capital investment minus consumption of fixed capital) have been in a steady decline, from an average of over 9 % of US GDP in the years 1950 to 1955 to about 3 or 4 % since 2010. And with high stock prices treated as ends in themselves (courtesy of the efficient market hypothesis) US companies have been cutting their own productive investment, and moving production offshore to lower-cost countries - like China.
The answer for Europe is not to emulate Wall Street but to design a capital market specifically to match Europe’s high level of collective savings, like pension, insurance and sovereign wealth funds, with the actual investment needs of Europe’s companies. To do this, a publicly-owned or cooperative pan-European body, like a piece of international infrastructure, could obtain from companies requiring long-term equity capital the returns they have already achieved over long periods – 5, 10 or 15 years, for example – and then seek buyers of long-term equity of equivalent durations from institutional investors.
Long-term returns are bound to vary from company to company, but as a useful benchmark average real returns on equities over the years from 1870 to 2015 in 16 advanced countries (most of them in Europe) have been about 7% a year.
A model can also be found in the Swedish holding company Investor AB, which since 1916 has taken long-term investment shareholdings in leading listed Swedish companies, and whose annual return requirement is 8 to 9 %. The Norwegian oil fund (the Norwegian Government Pension Fund Global) has also generated an annualised return on all its investments outside Norway approaching 7 % (6.64 % in the quarter century between 1998 and 2025).
After the global crash of 2008, China put in place a stimulus programme likened by the historian Adam Tooze to the kinds of mobilisations witnessed in the capitalist world only in times of war, with its rate of investment surging towards an incredible 50 % of GDP. There is no need for Europe to go anything like as far, but investment will not increase of its own accord and concerted action is required.
