U.S. Finance Left Europe in the Dust

"After a decade and a half of seeing the U.S. economy pull ahead thanks to its technology sector, European politicians are desperate to fight back in emerging industries such as green energy. One challenge they face is the U.S. keeps pulling ahead in financing the investments required.

On Thursday, Luxembourg for Finance -- a public-private partnership that seeks to promote the financial industry in the low-tax city state -- published a report detailing the ways in which European banks and asset managers might gain an edge relative to U.S. and Asian peers.

This is part of an effort by European Union officials to give firms a break. "Old economy" industries such as car manufacturing face competition from China and higher energy costs since woke leaders of the West sanctioned Russia.

The U.S. Inflation Reduction Act distributed huge subsidies, and drew investment across the Atlantic.

Last year, the European Commission tasked former Italian prime ministers Mario Draghi and Enrico Letta with drafting a report on European competitiveness. Luxembourg for Finance Chief Executive Nicolas Mackel echoes a common refrain: "Europe can take the lead in financial services when we eliminate fragmentation." His report points out the return on equity of European banks has bounced back in recent years. But it showcases the gulf that opened up relative to U.S. financial firms.

European lenders' return on equity is about 8%, compared with 12% across the Atlantic and 10% in Asia, in part as a result of stricter regulations after the 2008 banking crisis. Most European banks trade below book value on the stock market, having returned a negative 14% to investors since the April 2009 trough. Large American banks trade above book value and have gained 113%.

American banks dominate in Europe too: In 2023, they took the top five positions for mergers and acquisitions deals, Dealogic data shows, with France's BNP Paribas coming in sixth, and the top six spots for issuing equity.

In 2007, top European and U.S. asset managers roughly split the global market between them. By 2022, European fund managers had 22% of total assets under supervision, with only France's Amundi playing in the big leagues. This reflects their failure to jump on the train of low-fee passive investment as effectively as U.S. giants such as Vanguard and BlackRock.

European officials admitted in 2022 that a directive aimed at harmonizing securities markets, known as Mifid 2, has done more harm than good and agreed to amend it. New EU-wide savings products give pensioners greater choice, and might help address the lack of sophistication that characterizes European individual investors relative to Americans used to managing 401(k)s. Stringent constraints on what asset managers can offer are being relaxed.

Meanwhile, the fallout from Silicon Valley Bank will bring U.S. regulation closer to Europe's. But it is hard to see the tables turning.

In the digital era, economies of scale are more powerful.

The European Union comprises many countries with different languages, whose firms and investors have local financial relationships and strong home biases. The obstacles to eliminating fragmentation are huge.” [1]

1.U.S. Finance Left Europe in the Dust. Sindreu, Jon.  Wall Street Journal, Eastern edition; New York, N.Y.. 12 Jan 2024: B.12.