Finance for Europe

In his latest report on Europe’s present and future competitiveness, Mario Draghi argues that Europe is in a paradoxical situation: it appears stable but has unknowingly fallen ill. It has set ambitious environmental targets, possibly beyond its reach, while neglecting applied business research and struggling with the ambiguity between national sovereignty and the role of supranational institutions. Rather than treating terminal illnesses, can we still prevent the worst through proactive interventions? And can finance play a role?

Europe in the Third Millennium
It is easy to overlook Europe’s economic strength: a market of 440 million consumers (about one-third larger than the US) and 23 million companies, generating roughly 17% of global GDP (compared to over a quarter produced by the US). These achievements are coupled with a more equitable income distribution than elsewhere: Europe’s income inequality is ten percentage points lower than in the US and China. Life expectancy is also high: European women live on average to 82 years and men to 76, compared to 79 and 73 in the US. Europeans, therefore, tend to live longer – and likely better – than many Americans and Chinese. Europe is also ahead in applying democratic principles and maintaining a strong education system.

Economic Performance: The Reality Check
Given these strengths, one might expect Europe’s economic performance to be equally impressive. Yet Draghi’s report brings a reality check: the GDP gap between Europe and the US has doubled in the past twenty years, rising from 15% in 2002 to 30% in 2023. Italy exemplifies Europe’s broader economic struggles, with stagnant per capita income for 25 years and economic growth slipping back to 0.5%, despite structural transformations promised by the EU Recovery Plan (PNRR). This remains better than Germany, which is expected to contract by 0.5% in 2025.
Seventy percent of this economic gap is explained by productivity differences. Over the past two decades, one major microeconomic factor has driven these disparities: artificial intelligence. Europe lagged in developing this technology and, more crucially, failed to build businesses and models capable of sustaining innovation. Two striking facts illustrate this reality: no European company founded in the past fifty years has surpassed a market capitalization of €100 billion, whereas all six US firms valued over $1 trillion today were founded in that same period. In 2021, European companies spent only half as much on R&D as their American counterparts.
However, the economic gap is not just about AI. Looking at history, we might recall the title of a Led Zeppelin song: The Song Remains the Same. The average real return on US stock markets has outperformed European markets by 2% annually, likely reflecting long-term structural differences in economic strength.

Closing the Gap
Bridging this divide is no simple task. The Draghi Report identifies several systemic improvements that could help, such as making it easier for university researchers to engage in entrepreneurship, strengthening copyright protection, and simplifying institutional and regulatory frameworks to encourage business growth. While these are valuable suggestions, they seem like minor remedies given the scale of the problem.
According to Draghi, closing the gap requires an annual investment increase of €750-800 billion, equivalent to 4.4-4.7% of Europe’s 2023 GDP. This would mean raising total investments from the current 22% to 27% of GDP – against the trend of recent years – requiring Europe to allocate a quarter of its annual output to investments. For perspective, the Marshall Plan investment in Europe from 1948-1951 was just 1-2% of GDP.

Environmental Goals and the Energy Transition
Europe has positioned itself at the forefront of global sustainability. The report outlines its ambitious environmental commitments: the EU has enacted binding legislation to cut greenhouse gas emissions by at least 55% by 2030 (compared to 1990 levels). The US, in contrast, has set a non-binding target of a 50-52% reduction from 2005 levels, while China only aims to peak its emissions by the end of the decade. As the report notes, “these differences create enormous short-term investment demands for EU businesses that their competitors do not face.” EU Economic Commissioner Valdis Dombrovskis recently stated in an interview that reducing bureaucratic costs for businesses has now become a priority for European institutions.

The Role of Finance
Where can the resources for a scaled-up Marshall Plan come from? European private investors are highly risk-averse and reluctant to fund innovative start-ups. Institutional investors are unevenly distributed (with many in the Netherlands and far fewer in Italy) and often lack the expertise to invest rigorously and strategically in new technologies. Meanwhile, European banks, according to the report, lack the necessary products and capabilities to finance venture capital. Their profitability is also hindered by the absence of a Banking Union and the excessive fragmentation of national financial markets, which remain insufficiently integrated.
The report suggests that increasing banks’ lending capacity could be facilitated by more pragmatic regulations allowing for greater use of securitization techniques. The recent introduction of a legislative and regulatory framework for real estate securitization in Italy is a step in the right direction. This measure could help diversify funding sources for much-needed development and urban regeneration projects across the country.

Conclusion
Europe stands at a crossroads. Its strengths remain undeniable, yet the economic gap with the US has widened, fueled by lower productivity, weaker investment in innovation, and structural financial barriers. Draghi’s report offers both a diagnosis and a path forward: Europe must invest more, reduce bureaucratic burdens, and create a financial system that fosters, rather than hinders, growth. The challenge is immense, but the alternative – continued stagnation – is far worse.

Andrea Beltratti is Full Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Real Estate Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) at the SDA Bocconi School of Management.

Alessia Bezzecchi is an Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is the Program Director of the Executive Master in Finance (EMF) and of the Executive Program in Real Estate Finance and Real Estate (EPFIRE).

Photo iStock / akinbostanci