EMCC European Monitoring Centre on Change

Financial markets and the funding of enterprises in the European Union: what future?

This report seeks to address the question whether the structure of business finance in continental Europe is likely to converge towards the model observed in the UK and US economies where financial intermediaries, especially banks, play a much smaller role in the allocation of savings to productive investment purposes.

Key drivers of change

A first building block of the scenarios is a review of the structure of business finance in Europe, which reveals a traditionally greater reliance on bank finance than bonds or equities. Nine key factors that drove change in the nineties are identified:

  • the information and communications revolution;
  • globalisation;
  • the European single market for financial services and the euro;
  • monetary and fiscal policies in Europe;
  • privatisation;
  • an increased willingness by households to take risks;
  • the growing importance of non-financial intermediaries;
  • venture capital;
  • restructuring and consolidation in the financial sector.

Depending on the circumstances, all of these factors, with the exception of privatisation, are likely to remain important agents of change in the coming years. In addition, today's new pressure points may impact on the shape of financial markets, such as the uncertain economic outlook, distrust in large companies and disillusionment with stock markets, corporate governance and corporate social responsibility. The implications of pension reform and the implementation of the new capital requirements (Basel II) are also considered. The report then goes on to assess scenarios for the future.

Possible scenarios for business finance in Europe

In the high range scenario, equity financing may regain lost ground, while in the mid range scenario bond finance may become a more important source of funds for businesses in Europe. The low range scenario foresees bank finance gaining further in importance.

Overall, it appears unlikely that expectations, formed during the recent stock market boom, of major change in the structure of business finance, will be realised soon. Loans from banks and other financial intermediaries will remain a vital source of business finance in most EU Member States.

Further information on financial markets

In 2002, EMCC commissioned a report on developments in financial markets from 1990 to the present time. The financial system as a driver of change sets out an analysis of the main pillars forming the financial system and the functions they fulfil. It looks at how developments in the financial system's structure have affected change and economic growth, both at the macro (industry and regions) and micro level (organisations). This report is available as a pdf document (573 kb) on request to emcc@eurofound.europa.eu .

Access information:
The full scenario report is available for downloading free of charge as a pdf file (175 kb) by clicking on the link below.

Assessment
This report provides a sound review of the many factors that drove change in business finance during the economic boom of the nineties. It assesses the pressure points that exist today and how these are likely to drive change for the future.

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