Almost all of Europe’s problems are long-term and intractable. This is also the case when it comes to the European Union’s lack of deep capital markets, which leaves firms reliant on bank financing. As well as inhibiting the growth of existing firms, it also makes it more difficult for new, innovative ones to grow in the first place. Bank financing favours incumbents with collateral, which start-ups and scale-ups often do not have.

This is something the European Commission has at least recognised. This week it has unveiled an ambitious package of reforms to simplify the continent’s financial markets. But will this actually work? The plan seeks to help market participants operate more seamlessly across member states, in the hope this will reduce the cost of cross-border transactions, as well as transferring numerous competences to the European Securities and Markets Authority. Under the Commission’s proposal, ESMA will also take over supervising the EU’s crypto-asset service providers.

These proposals are, in some respects, likely to be controversial enough in and of themselves. National regulators and their governments have often been reluctant to send powers over to European-level regulators, including ESMA. This is likely to be much different this time around, given the increased urgency of the continent’s economic stagnation.

But even then, regulatory barriers are far from the most significant reasons for the EU lagging behind on capital markets. One issue which has received very little attention but is more significant is pensions. Jacob Kirkegaard has pointed out that Americans collectively invested about 140% of their GDP via private pensions vehicles in 2023. Brussels lags way behind the US on market capitalisation. Last year, the market capitalisation of EU stock exchanges was 73% of GDP, compared with 270% in the US.

Only a small number of European countries, including the Netherlands, do something similar. It’s no coincidence that the Netherlands also has some of the EU’s deepest capital markets, and with it one of the union’s most prosperous and innovative economies. But the Dutch collectively invest almost as much via private pension funds as the rest of the euro area put together.

Then there is the lack of a single safe asset, another clear deficiency compared to the US. While treasuries sit at the base of the American capital market pyramid, there is nothing similar for the euro.

Meanwhile in Britain, the Office for Budget Responsibility (OBR) downgraded the country’s predicted productivity, meaning that the economy is expected to grow at a measly 1.5% per year over the next five years. Deputy Prime Minister David Lammy has now even gone so far as to call for the UK to rejoin the customs union with the EU.

None of these issues — in the EU or Britain — will be resolved anytime soon. Comprehensive and genuine pension reform, much less a fiscal union, has already been put in the category of politically impossible. Instead, Europe has to deal with a Potemkin capital market while Britain plods along.

This is an edited version of an article which originally appeared in the Eurointelligence newsletter.