focus on investment gaps and capital markets

The von der Leyen majority he resisted following the shock wave of the European elections, reorganization is taking place within the European Parliament, despite therise of the right and the resulting political fragmentation. A determining factor in view of the huge ones investments required to carry out the objectives of the Green Deal (energy and digital transition) and to guarantee the EU competitiveness on international markets. Investments that will be guaranteed by huge issues of public debt and also by private financing, but this requires overcoming the challenge of the Union of Capital Market.

An analysis of Scope Rating, the European rating agency, highlights the main causes that fuel the investment gap and the possible solutions in the aftermath of the European elections. The report, edited by Eiko Sievert and Tom Giudice, Sovereign and Public Sector, highlights three determining variables.

The investment gap

It is expected that the debt issues in the EU increase tenfold 1,000 billion euros by the end of 2026compared to less than 100 billion in 2019, confirming the EU's financial support in response to recent crises (pandemic, inflationary and geopolitical).

Despite the explosion of public emissions, it is still estimated a investment gap of 500 billion euros to finance the ambitious objectives of the double transition and the recovery of the EU's competitiveness.

For this reason, Scope rating believes that, to close the gap, it will take a mix of public and private investmentsincluding large-scale public-private partnerships, the future joint debt issuance and the direct mobilization of private capital. This cannot be ignored by the Capital Market Union (CMU), i.e. the capital market union, the only chance to mobilize such investments.

The worsening of public finances

The fear of a new debt crisis, in this situation, would be around the corner, as confirmed last week by the rapid increase in spreads throughout Europe and especially in the More “fragile” countriesas the France and those with the highest debt public. The triple pandemic, economic and geopolitical crisis has in fact required superhuman efforts from EU countries and worsened the situation of public finances even in economies that were not previously experiencing this plague.

If before Covid the “peripheral” and southern states, such as the Greece (with debt at 155% of GDP), Italy (140% of GDP) and the Spain (105%), now even central European economies are suffering the plague of high public debt, such as France (112%) and the Belgium (106%).

Excessive deficit procedures are about to be announced for approx 11 European countries, including Italy, France, Belgium and Spain. It is obvious that in this situation fiscal consolidation is urgently needed, which however would limit public financing of investments. The implementation of one tax reform will therefore be crucial, as failure to meet medium-term objectives could also exclude high-debt countries from other crisis support mechanisms such as the ECB's Transmission Protection Instrument.

The urgency of a Capital Markets Union

An excessive deterioration in public finances could tie the hands of the main European powers by preventing them from investing. This is why, according to Scope Ratings, it is necessary implement a stable, competitive capital market and above all participated not only by public finances and private investors, but also by citizens and companies themselves.

It is in fact a peculiarity of European companies resort above all to the banking channel e only 10.7% of the funds raised come from the capital market. And, while there are clear differences between member states, with a larger share in France (17%) and Germany (9%), the EU overall lags behind countries benefiting from deeper capital markets, such as UK and the US, where more than a quarter of corporate financing comes from bond or equity issues.

At the same time, the family savingsalthough large, it is not channeled into the financial markets to support businesses and the economy and chooses more traditional jobs. In fact, private investors invest a sum of money in the capital market equal to only 90% of GDP, except for countries such as Denmark (187%) and the Netherlands (174%). Figures significantly lower than those of United Kingdom (182%), where families invest in insurance and pension products, and far behind the United States (311%), where households hold a high share of their financial assets in listed securities, equity and investment funds.

The unknown France

The European elections, as we know, have brought right-wingers are in vogue almost everywhere in Europe, but in France Marine Le Pen's Rassemblement National even has put Macron's presidency in crisis which was forced to call flash elections. How will this affect French economic policy?

According to Scope Ratings, the French elections in July they might increase and decrease the government's capacity to address challenges more urgent in credit matters, including the consolidation of public finances. They are expected three scenarios: 1) Macron victory: such a result would moderately support the reform momentumstalled since Macron's party and its allies lost their absolute majority in parliament in 2022, although the diversity of political priorities among potential coalition partners could call into question the French president's ability to build consensus on reforms that the government should prosecute. 2) Maintenance of the status quo without majority: the impact on reform momentum could be neutralas the political capital used by Macron to call the snap elections would be balanced by the regained legitimacy of his political program, even if the lack of an absolute majority would remain an important constraint for the presidential party, with a limited impact on the ability to implement reforms . 3) Cohabitation: Such a scenario, in which Macron has to work with a prime minister from the Rassemblement National, would likely lead to a political stalemate until the next presidential election and could increase the risk of policies that are not favorable to businesses and/or further fiscal easing in the near term.