The International Monetary Fund (IMF) has said in a new paper that the continent should move to reinvigorate its economy through venture capital.
Stepping Up Venture Capital to Finance Innovation in Europe says that the private capital within Europe is ‘smaller and more fragmented’ than in the US, with many citizens putting their savings in bank accounts rather than investing them into the capital markets. Markets, the IMF wrote, are also fragmented due to conflicting rules and regulations that hamper cross-border consolidation, capital raising, and risk-sharing.
The paper was authored by Nathaniel Arnold, deputy resident representative to the EU in Brussels; and Guillaume Claveres and Jan Frie, both economists for the IMF.
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An accompanying article from the trio said: “Europe’s fragmented economy and financial system partly underly this problem. Without a more frictionless single market for goods, services, labour, and capital, it’s more expensive and difficult for successful startups to scale up.”
They added: “Americans invested $4.60 in equity, investment funds, and pension or insurance funds for every dollar invested in such assets by Europeans in 2022. In part, this is because Europeans rely more on pay-as-you-go pensions than Americans. But regardless of the reason, the end result is less availability of equity financing for companies.”
Stepping Up Venture Capital to Finance Innovation in Europe makes the case that while issues around regulation can be tackled, another priority will be to consolidate the stockmarket. This will, in turn, improve exit options for successful startups, according to the IMF authors.
They added that other steps will be more politically challenging while technological differences can be dealt with immediately.
Arnold, Claveres and Frie stated: “The Eurogroup’s March 2024 statement on priority actions to advance the CMU contains a number of ideas worth developing in greater detail, including on supervisory convergence, harmonizing insolvency and accounting frameworks, improving conditions for cross-border investment in equity, consider developing new instruments at the EIF to facilitate VC exits, and developing occupational and private pension schemes.”
They concluded: “While progress has been made in some areas, such as the ESAP and FASTER initiative, many of the recommendations put forward by the IMF five years ago in the three areas of transparency, regulation, and insolvency, remain valid today.”
