The Capital Constraint

Europe finds itself at an uncomfortable crossroads. Squeezed between the technological dynamism of the United States and the industrial scale of China, Europe is confronting a structural competitiveness gap that has been widening over the years. As the Draghi report warned, without an additional €750-800 billion in annual investment by 2030, this gap risks becoming irreversible.

The Capital Constraint: Abundant but Ineffective Savings 

Mobilizing the needed financial resources requires, first and foremost, a well-functioning financial system. Capital is the enabling infrastructure of innovation, and European capital is structurally misallocated. In the EU, households save more than in the United States, but these savings are not channeled into productive capital market investments. Venture capital remains a fraction of what is available in the US, and European startups consistently struggle to raise the financing needed to grow at home. The consequences of this are visible: a steady stream of promising European firms relocate to the United States in search of capital and a more favorable legal environment.

Rethinking the Financial System: The Central Role of Banks

Addressing these consequences requires more than redirecting savings — it requires rethinking how the entire financial system is structured. The European financial system relies heavily on banks and will continue to do so: this is not a structural flaw to be corrected, but a feature to be built upon. The challenge is to develop deeper synergies between the banking sector and capital market participants, for example by enabling banks to originate, distribute and co-invest alongside institutional investors, private equity and debt funds, with the adequate safeguards in terms of financial stability. 

Financial Integration and Regulation in Support of Growth

A more integrated financial system would allow European savings to finance the green transition, infrastructure investment, technological transformation and defense, without abandoning the intermediation role that banks perform well. The current debate over bank regulation becomes directly relevant here: the question is not whether to dismantle prudential discipline, which remains essential for financial stability, but whether Europe’s regulatory architecture is calibrated also to support lending to the real economy — particularly the industrial sector — and competitiveness, rather than merely to prevent crises.

European Initiatives and the Challenge of Implementation

To address the abovementioned issues, the EU has responded with an ambitious, but still unfolding, policy agenda. The Competitiveness Compass, published by the European Commission in January 2025, sets out Europe’s strategic response and identifies three core imperatives: closing the innovation gap, decarbonizing the economy and reducing strategic dependencies. The Compass also identifies five "horizontal enablers" to support these objectives, one of which is the Savings and Investments Union (SIU). Launched in March 2025 as the successor of the long-stalled Capital Markets Union, the SIU aims to connect household savings to productive investment, reduce supervisory fragmentation, revitalize securitization markets and advance the completion of the Banking Union. These are not new ambitions, but the political momentum behind them is greater than it has been in years.

Recognizing that a more competitive banking sector is a necessary building block for this broader agenda, in early 2026 the Commission also launched a targeted consultation on the competitiveness of the EU banking sector, a signal that the regulatory conversation is shifting from asking how to make banks safer to asking how to make them more capable of financing the growth Europe needs. 

None of these initiatives will deliver results automatically. The obstacles — divergent national interests, incomplete banking union, fragmented supervisory structures — are well known. But the external pressure seems to be greater than it has ever been. Europe’s strategic role in a world shaped by US-China rivalry will be determined, in no small part, by whether it can build the financial and institutional infrastructure that its ambitions require.