Can Europe’s financial markets fuel an industrial revival? | Fortune

But where American capital is one of the U.S. economy’s great strengths, famously accelerating business growth there, Europe’s capital doesn’t deliver in nearly the same way.

Startups struggle comparatively to raise funds, turning to U.S. venture capitalists for 35% of the continent’s growth funding pool, per Atomico’s State of European Tech 2024 report. Lower liquidity in Europe’s disjointed public markets, meanwhile, presents growth-stage companies with a stark choice: face the prospect of listing at lower valuations compared to the U.S., or IPO in New York.

Despite Europe’s leading talent pools and R&D capabilities, which are key ingredients for a flourishing innovation economy, the money isn’t flowing. Fully 25% of Europe’s vast savings capital is directed to international markets, and too little of what remains finds its way into equity.

The role of policy

There are many in Europe who believe that its industrial revival hinges on policy reforms to bridge this funding gap, allowing Europe’s businesses to better benefit from its financial firepower. 

Alexandru Voica, head of corporate affairs and policy at generative AI startup Synthesia, tells Fortune that this begins with establishing a more cohesive legal and financial ecosystem.

He points to the 28^th Regime, a proposed directive by the European Commission which would “bring regulatory harmonization across the EU and help startups operate as a single legal entity.”

The initiative aims to simplify the ways businesses operate across borders, smoothing the administrative burdens of setting up in a new country—essentially making them more attractive investment prospects.

At the same time, the likes of former European Central Bank chief Mario Draghi have renewed calls to deepen Europe’s Capital Markets Union—a policy objective launched in 2015 that has since stalled. If successful, this would theoretically improve access to funding for the most promising companies by replacing lots of smaller capital pools with one much larger pool.

The importance of scale—in both real and financial markets—is hard to overstate, and Europe’s most promising scaleups generally operate cross-continentally. As a case in point, British AI infrastructure startup Nscale, which recently raised a $1.1 billion Series B, is eyeing an expansion of its data center projects throughout Europe.

To remain competitive, “and to win”, Europe has to “think big and act as one,” Nscale’s chief business officer Phillip Sachs says. “Alone, no European nation can rival the continental economies of the U.S. or China. It must wield the scale, capital, and conviction of the entire continent.”

Bringing pensions and bank savings into play

The most promising capital markets policy areas for European industrial competitiveness are about behavioral change: encouraging the continent’s institutional investors and savers to put their money into higher-risk, higher-reward investments within Europe.

For example, the proposed Savings and Investments Union (SIU) aims to unlock some of the estimated $10 trillion of household savings in the EU that are held in low-yield savings accounts, instead of capital markets. Indeed, according to a report from consulting firm Oliver Wyman,  “Households in the EU hold only about 17% of wealth in financial securities, compared to about 43% in the U.S.”

The SIU would enable financial institutions to channel these savings into more productive investments through measures like standardizing and simplifying securitization, and offering Europe-wide tax incentives for equity-linked savings accounts.

Voica says that, in theory, the SIU would help governments to encourage savers to “stop rushing to cash and embrace stocks and shares investments.”

The onus isn’t just on the government; he notes that the industry also needs to step up when explaining why making more growth-oriented investments benefits both consumers and the country. “It’s a very similar parallel to institutional investors. They hoard cash in these ‘safe’ investments, such as real estate—so we need to discourage everyday consumers from solely making these safe investments,” Voica says.

There’s more to getting Europe’s financial institutions to take some risks than polite nudging, of course. Nathan Benaich, general partner at Air Street Capital, says these institutions are long overdue for an overhaul, but points to important structural differences that need to be overcome. 

For example, Europe lacks the infrastructure of endowments and foundations that have long formed pillars of the U.S. venture financing market, he says.

Historically, European pension funds were also bound by stricter regulatory frameworks that prioritized short-term solvency, and, by extension, more conservative strategies than their U.S. counterparts.

This means that they are strongly incentivized to back safer bets such as low-risk government bonds, says Kinga Stanisławska, co-founder of European Women in VC.

The result is that, as of 2025, just 0.1% of European pension fund allocation was channelled into VC funds. By contrast, U.S. public pension funds in 2024 allocated around 10.4% to private equity investments, which include VC funds, according to a report by European Women in VC.

The U.K. has made some attempts to move the needle with the likes of the Mansion House reforms, an initiative in which 17 of the country’s largest workplace pension providers committed to investing at least 10% of their defined contribution default funds in private markets by 2030.

Regulatory reform is a key governmental lever here, while other efforts involve using public capital to derisk and catalyze investment by private institutions.

Tamara Savic, investment director at Norway’s state-owned fund EIFO, points to the newly-announced Scale Up Europe Fund, an initiative where public and private partners—including the European Commission and EIFO, along with several pension funds—have come together to pump billions of euros into late-stage growth companies.

It may seem like uncharted territory, she says, but European institutional investors have a lot to gain by directing more capital to growth funds, both directly and indirectly. After all, giving companies better access to capital should strengthen the economy, thereby earning better returns for funds and allowing pension savers to “benefit directly from the wealth and job creation emerging out of Europe’s innovation ecosystem,” Savic adds.

Structural change creates more risk appetite

Reforms could also benefit Europe’s public markets, where growing companies often struggle to tap into large-scale equity funding. 

This is where governments can swoop in, says Christophe Williams, cofounder and CEO of solar technology startup Naked Energy. “The U.K. government has made a great start in addressing this problem by introducing guidelines for the National Wealth Fund to act as a guarantor for renewable energy projects,” Williams says. It reduces the risk for investors looking at these projects, and so encourages more investment into these scaleups, he adds.

“What the space really needs is for financial institutions to start investing in smaller ‘first of a kind’ projects worth tens of millions,” he adds.

It’s a sentiment Matthew Blain, investor at climate fund Voyager Ventures, agrees with. “Europe probably wouldn’t have funded Starlink,” he says, stating that he would like to see more appetite for risk so that the most outlandish ideas can get funded on the continent first—and become market leaders.

That is partly a cultural challenge but the hope is that, with time, structural reform will lead to a culture of savers, investors and institutions more vigorously supporting growth.

“There’s a tendency in Europe to sit on the sidelines and complain about bureaucracy, but the continent has so much going for it,” Blain says. “How can Europe do its job better? I’d like more VCs to push their companies from day one to build globally dominant companies, rather than regional or even national champions that get acquired.”

That, in turn, would provide the ultimate incentive for European capital to back European businesses.