IMFBlog,update

 

Dear MARIA, We just published a new blog—read the full text below. Financial Market Reforms Could Lift Europe's Growth (Credit: Traimak Ivan/iStock by Getty Images)  By Luis Brandão-Marques, Damien Capelle, Diego Cerdeiro, Rui C. Mano  French startup Mistral AI’s recent financing round was led by ASML, a Dutch maker of semiconductor manufacturing equipment. Such cross-border investments—even when small relative to US deals—are not the norm in Europe. Far more often, good projects fail to scale. Among the reasons: Europe’s considerable savings are compartmentalized within national borders, and hard to connect to high-risk, high-return projects.   The main burden falls on Europe’s young and innovative companies, as we show in a new IMF Staff Discussion Note exploring how fragmented and shallow European financial markets continue to hold back their growth. For investors, especially individuals, this means less opportunity to diversify risks and insulate themselves from domestic turmoil by investing abroad. The note shows that differences in banking regulations, safety nets (notably deposit insurance) and insolvency regimes across countries impede cross-border bank lending. Meanwhile, rules that limit provision of risk capital by pension funds and insurers limit the scale of venture capital.   As this Chart of the Week shows, even a moderate reform effort that reduces barriers to cross-border banking could raise European Union GDP by about 2 percent in the long term. These gains would come from better allocating savings across countries and companies, as well as businesses being able to reach potential lenders, which would lower funding costs. Adding reforms to ease legal and tax-related impediments to cross-border venture capital investment, together with measures to expand long-term risk capital through pension and insurance reforms, could bring the estimated gain from financial reforms close to 3 percent. These financial reforms reinforce significant gains that could come from boosting business dynamism and innovation. Making Europe a more dynamic place to start and grow new businesses—for example by improving the business environment, investing in skills, and supporting research and development—would raise the pool of projects with high potential returns. Combining financial and real economy reforms can lift the long-term GDP gain into double digits.   Europe needs action on three fronts: Pressing ahead on the banking union by reducing regulatory and institutional differences, and harmonizing insolvency frameworks.  Completing the financial safety net, including through a European deposit insurance scheme, would reduce adverse sovereign-link bank feedback loops, supporting economic and financial resilience overall. Strengthening venture capital and equity financing more broadly by expanding the pool of long-term risk capital, and easing cross-border investment frictions. Improving the business environment so that this newly available capital finds more attractive projects to finance. Innovation and finance go together: reforms that create more promising companies will go further when Europe’s savings can flow freely to fund them.   —The Staff Discussion Note team also comprises Adriano Fernandes, Alexandra Fotiou, Yueling Huang, Claire Li, Alberto Musso, Ese Onokpasa, Richard Varghese, and Maryam Vaziri. Read the blog Recent blogs Tokenization Can Change The World's Financial Architecture Policy choices will determine whether tokenized finance strengthens or fragments the financial system The Energy Shock Is Testing Government Budgets New policy tracker shows many governments pursuing costly responses to fuel and food price hikes, leaving less room to address future challenges Global Economy Endures War Shock—So Far An overall resilient world economy masks significant differences among countries and regions. Energy importers and countries with limited policy space are most vulnerable Thank you again for your interest in the IMF Blog. Please write to us directly and let us know your thoughts. We would love to hear from you.   Jeff Kearns  Managing Editor | IMF Blog  jkearns@IMF.org Stay connected with the International Monetary Fund:       This email was sent to politikimx@gmail.com on behalf of: International Monetary Fund 1900 Pennsylvania Ave NW · Washington, DC · 20431