Themis Foresight project: Futures of the European Capital Market

Dear reader, 

The good news first: According to Bloomberg NEF, investments in the clean energy transition have increased by 17% in 2023, reaching 1.8 trillion USD. The bad news: In order to reach net-zero carbon emissions by 2050, 4.8 trillion USD are needed every year from 2024 to 2030. 

Still, on the side of the good news is that there is enough available capital in the market to achieve this goal. But the way, the European capital market functions currently, it appears somewhat doubtful that the EU will be capable of achieving its share of the 4.8 trillion USD that are needed for the net-zero transmission. 

• The EU’s capital market is fragmented into 27 legislations and next to existing ones, a number of EU-wide regulations will appear on top (like CSRD-reporting). Yet, the Capital Markets Union (CMU) proposed by former EU Commission president Jean-Claude Juncker in 2014 is not gathering the momentum that is needed for it to become a reality. 

• Compared to the U.S. capital market, the European one seems to perform less. While the EU has a higher general investment rate (investment to GDP ratio) compared to the U.S., the U.S. outperforms the EU in "productive" investments, investing 2% of GDP more. These are assets directly used for economic production, such as equipment, intangible business capital, and infrastructure, rather than non-productive assets like residential buildings. For non-construction investments like machinery, equipment, and intellectual property, the gap widens to 3.8% of GDP in favor of the U.S. 

• The European banking system holds 300% of the EU’s GDP in assets, while in the U.S. it is only 85%. But the U.S. has a strong and active asset management industry. 

• For good reasons, banks need to demonstrate a Tier 1 capital ratio [Kernkapitalquote]. Thus, banks are limited in comparison to the asset management industry to take on risks. And to the extent that banks are invested in the operational phase of energy transition projects, it takes a long time to earn capital for new investments. 

These basic facts pose the question of radically reforming the structure and the functioning of the European Capital market. 

Themis Foresight Study: Futures of the European Capital Market

Themis Foresight is in the final throes of publishing a study on futures of the European capital market. This study investigates alternatives to the current capital market structure. And we invite you to stay tuned when we will publish the study in the end of August.  

In the meantime, we invite opinionated readers of our newsletter with knowledge of the European capital market to comment on four possible scenarios for the European capital market. If you provide your e-mail address, you will receive our research results after completion of the study. 

All four scenarios may appear on first read to be illusory or “impossible” to achieve. But we created the scenarios for one purpose only: What needs to be done to achieve the net-zero transition of the European industry? We assumed that under each scenario, the net-zero targets will be reached. But we looked at two core parameters of change: 

1. Will the European capital market stay as fragmented as it is? Or will we achieve a CMU? 
2. Will banks continue to hold 300% of GDP in assets? Or will the European asset management industry grow and shoulder more of the risks (and rewards) of the net-zero transition? 

We look forward to informed comments of our readers that can challenge, validate, and modify the four scenarios that we currently propose. The survey closes at 23:59 (CET) on the 14th of July. The link below leads to a survey in two languages, English and German. Should the survey open in the language you are not comfortable with, toggle to the other one at the upper right corner.

LINK TO THE SURVEY 

We look forward to sharing the results of our study once it is published in late August, and as usual, for free. 

Thank you for your participation!

And to those who will soon embark on a much-deserved summer holiday – enjoy it, recharge, there’s much to be done. Future is what we make of it! 

Best,

Jan Berger and Carina Stöttner