March 7, 2024 - 4:00pm

Europe needs to go big or go home. That seems to be the message markets are sending. According to a recent story in the Financial Times, the continent’s equity markets are at a “record high” but “beneath the surface they are in crisis”: trading volumes are falling, IPOs are limited, and several major companies “prefer the appeal” of the US.

So Europe once again finds itself getting squeezed between a great-power rivalry — this time not between Russia and America, but between America and China. The Chinese state has been nurturing the development of its private sector for decades, and European governments have generally tried to manage perceived unfair advantages given to Chinese firms with tariff controls. But now that the Biden administration has responded with an aggressive industrial policy of its own, its so-called Inflation Reduction Act, or IRA, Europe feels besieged. As its firms lose foreign market share to subsidised competitors, the attraction of decamping to greener pastures is growing.

The IRA has succeeded in crowding in a lot of private investment, just as it was meant to do. But that has also lured capital from fund managers overseas. As a consequence, Europe’s stock markets, including London’s, are feeling the chill. Increasingly, firms launching IPOs are choosing to move to America, where deep pools of capital run by fund-managers with a high tolerance of risk make scaling up easier. The result has been the rise of mega-companies like the Magnificent Seven. So, for instance, just one member of the Magnificent Seven, Microsoft, is worth more than all the companies traded on the London Stock Exchange.

How to respond? Just as governments remain proud of their national defence contractors, so do they cling to their stock exchanges, the result being a fragmented structure with comparatively limited liquidity. Meanwhile, in large part because of the outsized impact of the prudent German finance ministry, Europe remains averse to industrial policy of the sort being tried in the United States. The same goes for Britain, where both major parties will run their next election campaign on platforms of fiscal prudence.

But, like it or not, the era of big government is back. European governments will probably have no choice but to either join the race or watch their rivals disappear into the distance. To compete with surging stock markets in China, the US and now India, where tech listings are multiplying, Europe will likely need to overcome its aversion to industrial policy and start assisting the expansion of its own firms.

Yet it would also help if governments could find a way to incentivise both their citizens and their fund managers to shift more of their savings into the stock market, as is the case with the US retail sector. And they will all benefit from ever more cooperation to widen their markets and deepen their capital-pools.

It’s not that Europe’s governments don’t recognise the challenge — they are trying to respond. But as we are always reminded, “recent history” often makes cooperation easier said than done.

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).