Christine Lagarde, President of the European Central Bank (ECB), emphasized the urgent need for Europe to integrate its capital markets to address the continent's declining innovation position and the growing threats to free trade. Speaking at the 34th European Banking Congress in Frankfurt am Main on November 22, 2024, Lagarde pointed out the lack of substantial progress toward the Capital Markets Union (CMU) and outlined the blockages hindering the flow of European savings into capital markets.
Lagarde identified three key stages where the "pipeline" from savers to innovators is obstructed: entry, expansion, and exit. She noted that European savings are not entering capital markets in sufficient volumes, with around €11.5 trillion held in cash and deposits, representing one-third of households' total financial assets. In comparison, the figure is only about one-tenth in the United States. Lagarde proposed a "European savings standard" to provide accessible, transparent, and affordable savings products across the EU.
The second stage, expanding throughout Europe, is also problematic due to the fragmentation of financial market infrastructures and the high transaction costs for cross-border trading. Lagarde suggested that a combination of a two-tier approach for entities meeting certain criteria to fall under EU jurisdiction and "28th regimes" for issuers of securities could help overcome these issues.
Finally, the third stage involves ensuring that savings exit the financial system into innovative sectors and companies. Despite the need for venture capital (VC) investment, Europe trails the United States significantly in this area. To close this gap, Lagarde highlighted the importance of allowing long-term investors like pension funds to contribute more to growth, fully utilizing public development banks like the European Investment Bank (EIB), and exploring venture debt as a means to support innovation.
Lagarde concluded by stressing the need for European leaders to move beyond awareness and willingness to take decisive action to overcome the fragmentation of capital markets, which is essential for Europe's economic dynamism and technological advancement.
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