BarcelonaThe approval of the Next Generation funds and, above all, the issuance of European debt to finance them are the most prominent step that the European Union has taken to bring its financial markets closer to the unified model that the United States has, considered by the most economists as the model to follow to improve the financing of companies, according to a study by the think tank Europe G presented this Tuesday in Barcelona.
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Despite having a monetary union of 20 countries that share the euro and a common market for goods and services of 27, financial markets in Europe are still highly fragmented by states. The EU has approved a banking union with a supervisory and resolution mechanism to deal with bank failures, but it still lacks a European system to guarantee the deposits of failing bank customers. In contrast, the US, being a single country, does have all these mechanisms at a federal level.
Also, unlike the United States, where companies have much more access to financing through capital markets – for example, the stock market or debt markets –, in the euro zone most of the productive fabric is financed especially with bank loans. “European companies have an extraordinary dependence on the banking sector,” explained the author of the study, Ángel Berges, professor of economics at the Autonomous University of Madrid and vice-president of the financial consultancy Afi.
For example, shares issued on US exchanges are equivalent to 220% of the gross domestic product (GDP, the indicator that measures the size of an economy) of the US, a figure that in the Eurozone falls to 80% . Likewise, corporate debt markets are much smaller in the Old Continent, where they represent 18% of GDP compared to 40% in the United States. On the contrary, the assets of European banks are 200% of GDP and those of North America only 120%, due to the large amount of credit that European entities give to the business fabric.
All of this greatly limits the access of European companies to financing to carry out new investments or to obtain liquidity in times of cash flow difficulties. According to the report, “the biggest gap between Europe and the United States occurs in those sources of financing most appropriate for financing innovative and risky investments.”
The importance of European bonds
Berges recalled that in 2014 Brussels started the process to start unifying the European capital markets, but a few months later it stopped due to Brexit. “Without the City of London, it was born lame,” said Berges. For five years the project was stopped and “practically nothing was done – he added – until the outbreak of the pandemic”, when the Next Generation program was approved, which is financed by public debt securities issued by the European Commission.
These Commission bonds are “important due to their volume”, since the European debt in the markets has gone from around 40,000 million euros just before the arrival of covid to more than 300,000 million today, Berges recalled. But they are also because this is the first case of “mutualization” of the debt of all EU countries with a “single issuer”. According to the report, this European debt issue is a first step to integrate the different member states in the financial sphere, although Berges admits that on a business scale it will be much more complicated because the EU has many more SMEs than the US, so going public or issuing debt is much more expensive for them.
Despite this, European bonds are still not “reference” in the markets, with the exception of green bonds – intended to finance projects related to the sustainable economy -, in which Europe is the world leader with 60% of the bonds issued in the EU and half denominated in euros.
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