Europe faces a ‘scale-up gap’: while it produces many innovative startups, they struggle to grow across Europe and access capital as they enter the crucial growth phase. Europe’s competitiveness and sovereignty hinge on whether it can close this gap and grow companies at home.
To do that, the continent needs strong public equity markets, which allow growing companies to access capital to finance their expansion. However, European public markets have struggled in the last decade. The number of new companies listing in Europe is well behind that of the United States (US) and their value has dropped significantly. Several of Europe’s most promising companies have chosen to list in the US.
Three weaknesses help explain the poor state of European equity markets:
- First, while Europe has plenty of savings, too little is invested in equities. Around €10 trillion of EU household wealth sits in low-risk, low-return bank deposits.
- Second, European equity markets are highly fragmented, with more than 30 stock exchanges splitting up liquidity.
- Third, the proportion of large European Initial Public Offerings (IPOs) on a stock exchange is too small – reducing liquidity and deterring the kind of institutional capital that drives significant investment in the US.
This matters for Europe: If the continent’s most successful companies list elsewhere, its stock markets lose firms that can attract additional capital and raise the profile of European markets. While European IPOs remain too small, strengthening public equity markets, could better support these same firms, which face higher financing costs and fewer opportunities to list abroad. European listings also support economic sovereignty by helping firms grow into global competitors and providing companies with an alternative to foreign acquisitions and listings.
Rather than relying on shortcuts such as lowering listing requirements or creating a single European exchange, the EU and member-states should therefore focus on three areas:
- Putting Europe’s savings to work. Pension reform and greater retail investment should shift more household wealth into equities. Deeper capital pools would improve valuations and liquidity, providing more funding for companies to scale.
- Reducing fragmentation to encourage the market-driven integration of stock markets across Europe, improving their liquidity and efficiency. This will then help attract and retain larger listings. Policy-makers should consider a new pan-European growth market for promising, young companies.
- Facilitating a stronger pipeline of firms ready to list in Europe. That means completing the single market to ensure companies grow in Europe, expanding late-stage growth capital and creating incentives for larger, higher-quality IPOs.
Together, these reforms would help revive Europe’s IPO market, creating stronger exit opportunities for founders and investors. A healthier IPO market would do much more than generate economic gains: it would strengthen European sovereignty by enabling companies in strategic sectors to grow in Europe and provide an alternative to unwanted foreign acquisitions or listings abroad.
