How a single capital market would unlock Europe’s potential

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David Bach assumed the presidency of Switzerland IMD business school in September and is a Nestlé professor of strategy and political economy

It has become conventional wisdom to view Europe as an economic power past its prime, overshadowed by the steady advance of the United States and the meteoric rise of China. Critics cite Europe’s declining share of global GDP, overregulation and sluggish investment as evidence of a “competitiveness crisis.” But this narrative obscures a deeper truth: Europe brims with untapped potential that, if fully harnessed, could dramatically reshape the global economic landscape.

Europe’s strengths in competitiveness, talent, innovation and sustainability could, when integrated into a unified capital market, radically transform its economic trajectory.

While many focus on the challenges of Europe’s largest economies, it is the smaller nations – Denmark, Finland, the Netherlands and Switzerland – that show what is possible. According to the IMD Global Competitiveness Ranking, these countries consistently outperform their global peers, revealing the power of a strong commitment to fostering talent and human capital through cross-border mobility and education.

While only 1 percent of American students and 2 percent of Chinese students study abroad, 15 percent of their European peers do. This emphasis on global learning fosters a more interconnected workforce, embodying the spirit of integration essential for future success. In fact, the number of EU citizens living in another member state has increased by 60 percent in the last two decades, a testament to Europe’s commitment to cultivating a truly global citizenship.

The impact is palpable at the highest levels of companies. Among the CEOs of Europe’s 20 largest companies, half are not citizens of the country where their headquarters are located. That compares with 20 percent in the United States and none in China. This diverse leadership leaves Europe uniquely positioned to navigate today’s geopolitical complexities.

Europe’s leadership in the energy transition also offers a blueprint for prosperity. It is ahead of the rest of the world, generating about 40 percent of its power from renewables, surpassing China and the United States, which generate 30 percent and 21 percent, respectively. Public support for green investment remains strong, with less partisan division, reducing the risk of drastic policy changes after the election. If anything, Europe’s efforts to become the first net-zero emissions continent are accelerating as a result of The Russian invasion of Ukraine.

Artificial intelligence It is another area in which Europe can exert influence. While the idea that Europe regulates while the United States and China innovate is a common criticism, Europe’s measured approach (exemplified by the EU AI Law) can set a global standard. Data privacy rules offer a precedent. American tech companies have criticized strict European rules, but comprehensive data privacy rules now protect three-quarters of the world’s population. And they have not stopped European companies. Can Europe do the same in establishing responsible AI practices globally?

History has shown us that Europe has been discarded before, only to re-emerge, often when least expected. This was evident in the implementation of the Single European Act in 1986, which launched the Single Market in response to increasing competition from the United States and Japan. Similarly, the creation of the euro and the region’s recovery from the global financial crisis demonstrate a resilient spirit. Today, as geopolitical tensions shift and the United States becomes increasingly unpredictable, Europe finds itself at another inflection point.

So how can Europe take advantage of this moment? Leveraging its competitive smaller economies, fostering a holistic and inclusive approach to sustainability and AI, and championing its global leadership in talent. Mario Draghi’s report on the future of European competitiveness makes numerous recommendations, including an ambitious investment of €800 billion. However, the most crucial step may be deceptively simple: a single European capital market.

What differentiates American and Chinese companies from their European counterparts is superior access to capital, which allows them to scale innovations and aggressively expand markets. Without deeper financial integration, Europe risks leaving much of its potential untapped. Creating an integrated European capital market would streamline access to finance and also empower innovative companies across the continent, allowing them to grow and compete effectively on the global stage.

The benefits of this capital market are multiple. It would facilitate cross-border investments, improve liquidity, reduce costs and improve the overall efficiency of resource allocation. By creating a more investment-friendly environment, Europe can nurture local champions and attract foreign investment to fuel its growth.

Furthermore, improving access to capital would allow European startups and small and medium-sized businesses to thrive, unlocking innovation in sectors such as clean energy, digital technology and advanced manufacturing. This, in turn, would reinforce the continent’s position as a global leader in sustainability and technology.

But Europe stands at a crossroads, with the potential to redefine its global position. Without deeper financial integration, there is a risk of leaving its potential untapped. Getting this critical area right will allow Europe to leverage its strengths and compete much more effectively than it currently does.