Europe needs to invest its savings

The big economic difference between the United States and Europe lies in the way savers prepare for their retirement. In the United States, they buy stocks on the stock market, while in Europe, they entrust everything to their governments.

This was the way—obviously exaggerated, but close enough—to highlight an important reason why the European economy is shrinking relative to that of the United States. Fewer savings flows into capital markets generate little investment capacity and, therefore, little competitiveness; less financing for companies, and especially SMEs, and lower returns for savers for their retirement.

The one who launched this provocation was Stéphane Boujnah, chief executive of Euronext, the main European stock exchange, which includes Amsterdam, Brussels, Dublin, London, Oslo, and Paris. He was speaking at the presentation of one of the new European Commission's key projects, the SIU (Savings and Investment Union), at an ESMA (European Securities and Markets Authority) conference in Paris in early February. The SIU, so named by Enrico Letta in his report, seeks to shift a large portion of European savings from low-yield accounts, deposits, and investments to capital markets investments—that is, in companies to meet the immense investment needs of the European economy. The Commission currently estimates that more than €10 trillion of retail savings in the EU are held in deposits and just over €4 trillion in capital market instruments. The ratio in the United States is reversed.

Changing this situation is vital to providing Europe with the resources to invest in innovation—especially digitalization—in sustainability, and now, in defense. But also to better finance SMEs and entrepreneurial projects on the continent. And to generate returns on private savings that allow for better retirement prospects for Europeans. In general, the European economy seeks to increase productivity and, therefore, the global competitiveness of an economy that has tended to lose ground and is at risk of decline.

As can be seen, multiple objectives in a single major project that must begin by "convincing" many private retail savers that it is in their absolute interest to invest in the markets and obtain better returns on their savings efforts.

Several paths must be outlined if the European Union and its member countries want to move forward in this direction. First, the capital market system must instil sufficient confidence in savers so that they are convinced that they will be treated fairly and offered an appropriate choice of investment products. The European Commission proposed this two years ago in the RIS (Retail Investment Strategy) to ensure that retail investors were properly protected and obtained sufficient value for their investments. As so often in Europe, the debate on this project has dragged on and is still awaiting approval by the three EU institutions: the Commission, Parliament, and Council.

Second, higher levels of financial and investment education—in fact, financial literacy—are essential. It must be established once and for all that citizens must be empowered to avoid financial setbacks, avoid fragility in their personal finances, and get the most out of their savings.

Third, incentives are needed to offer better guarantees and tax treatment. This will likely be achieved through instruments that facilitate liquidity, ease of contracting, moderate costs, diversification, and, even better, if they are European in nature. Some investment accounts of this type exist in European countries, and best practices could be applied in the form of a pan-European product.

Fourth, the range of investment instruments needs to be expanded to facilitate private co-investment with large public projects and facilitate securitization and investment in bank and large corporate portfolios.

Finally, and urgently, the complementary, occupational, and private pension sector needs to be developed and standardized at the European level. It is absolutely essential for Member States and the EU to incentivize investment in personal pensions and foster an attractive legal framework and product structure. This is quite the opposite of what is being done, for example, in Spain.