One of the most striking things about my conversations with CEOs at the beginning of the year was the deep pessimism about Europe. While it is important not to understate the challenges still facing the Continent, especially as conflict continues both on the Continent and in the Middle East, that negativity has undergone a remarkable reversal.
As I convene our Board of Directors in Paris this week, it’s clear to us that this nascent optimism presents an opportunity. European nations are making meaningful strides towards a more cohesive defence policy, and the Continent would also benefit from making more cohesive economic and financial strides—especially by reducing cross-border frictions and harnessing the power of a more integrated capital market and banking union.
I see reasons to be encouraged that Europe can make progress.
EU leaders clearly recognise that greater autonomy in the realm of defence and security is both a strategic and economic imperative.
First, the agreement of a new spending target among NATO members, and the historic shift in Germany’s positioning earlier this year, is testament to a fundamental change in mindset. As defence expenditures accelerate, the Eurozone is forecast to grow at a faster rate than predicted just a few months ago, with this fiscal expansion as a tailwind.
To be clear, prolonged war benefits no one. We are hopeful for swift and peaceful resolutions to the current conflicts.
Second, Europe retains important strengths. While international investors would like to see faster action, reforms in recent years by individual countries have improved tax regimes to attract talent and Europe remains one of the richest and largest economies in the world.
Our experience is a case in point. Over the last few years, Goldman Sachs has significantly scaled up our operations across Europe—from Warsaw to Frankfurt, and Milan to The Hague. Here in Paris, we opened a new office to accommodate our growing footprint, with almost 500 positions now on the ground and all our business lines represented in the city. This would not have been possible without the positive reform agenda in France.
Finally, Europe benefits from a rich talent pool. Its schools and universities, especially for business and engineering, are globally competitive. It does not lack for hungry and driven young professionals who are the foundation of firms like ours.
ECB President Christine Lagarde and European Commission President Ursula von der Leyen have recently made the same point: Per million inhabitants, the EU produces almost as many science, technology, engineering, and mathematics graduates as the US.
The open question is why these strengths have not translated to the same level of economic and entrepreneurial dynamism as in the United States.
I believe Europe can achieve economic dynamism, but only if more decisive actions are taken to unlock the full potential of the European market. These actions will require popular and political will, but there is reason to expect Europe can surmount the obstacles.
I offer five key suggestions as Europe seeks to reform its economy for a new era.
First, Europe should be clear-eyed about the burdens its regulatory environment currently places on business. I see it at Goldman Sachs and hear it from the CEOs I speak to around the world: Europe remains an outlier in terms of the extensive—often overbearing, duplicative, and costly—obligations it places on firms. Mario Draghi put this in stark terms: Europe’s internal barriers and regulatory hurdles are equivalent to a tariff of 110% for services and 45% for manufacturing.
I would encourage EU policymakers to look at the regulatory infrastructure that has mushroomed over the years in Brussels. Reducing or eliminating unwieldy and ineffective structures and processes will send a loud message that the EU is focused on efficiency, results, and economic growth.
As such, we warmly welcome the focus from the new European Commission, as well as leaders like President Macron and Chancellor Merz, on an ambitious programme of regulatory and administrative simplification. From our perspective, the scale of the challenge calls for a bold rethink, not tinkering around the edges.
The aim of reducing reporting burdens on business by 25% is a helpful north star. But meeting it will require both a different and detailed approach. The industry is eager to have a dialogue about how to focus reporting on information that is genuinely useful to authorities.
Second, member states need to play their part in building the pools of long-term capital needed to channel financing more forcefully into both public and private markets—where much of the economic activity in Europe is now happening. Plugging gaps in auto-enrolment, consolidating pension schemes, and introducing compelling incentives for retail participation in capital markets are key steps to take without undue delay.
A fundamental prerequisite of a Europe-wide ‘Savings & Investments Union’ is a strong capital market underpinned by robust engagement from institutional and retail investors. Europe is building on solid foundations in this respect, with an internationally regarded equity market structure that has seen it weather recent episodes of volatility effectively.
Third, special attention must be paid to Europe’s venture and growth capital ecosystem. This means freeing up pension funds and insurers to engage more with early-stage investments while looking at the scope for public funding to “de-risk” potential projects. America’s enormous advantage in the availability of early-stage risk capital is among its most important distinguishing features.
Europe must offer greater support for small businesses to engage investors and simplify the cross-border regulatory regime they face.
Fourth, it’s time for the EU to demonstrate a more serious commitment to its now decade-old pledge of creating a unified capital market. Any moves toward integration will allow more companies to diversity their funding, facilitate cross-border investment, and catalyse the risk-taking necessary for the innovation needed to better compete in the global economy.
The final piece is naturally the most challenging: How does Europe work collectively to put its interests first when one or two countries veto reform in order to protect their narrow parochial interests? I know this question goes back to the beginning of the EU. But decades of experience and evidence make it clear today: The focus on national interests over EU-wide interests is throttling the economic, financial, diplomatic, and military power of the region—the opposite of the goals of the EU founders.
Now is the time to translate ideas into tangible change. As I said earlier, the opportunity is there for the taking. Greater independence in an uncertain geopolitical landscape, nurturing world-leading innovative firms, and offering citizens the opportunity to benefit themselves through a true investment union, are major prizes.
My hope is for Europe to succeed in this endeavour. In a fragmented and increasingly volatile world, a self-reliant and dynamic Europe benefits us all.