Economic growth in Europe continues to trail behind that of the US, largely due to smaller productivity gains. A key factor behind this gap is Europe’s weak investment in sectors with high innovation potential, such as information and communication technology (ICT). In 2023, industrial R&D spending in the EU ICT software sector was under €20 billion – barely a tenth of the over €180 billion invested in the US (Nindl et al. 2024).
As also reported by Draghi (2024) and Letta (2024), a major hurdle to productivity-enhancing investment in Europe is insufficient capital market integration. Since the launch of the Capital Market Union initiative in 2015, progress has been limited, and Europe’s capital markets remain fragmented. The plan to build a Savings and Investment Union initiative, launched by the European Commission in 2025, aims to revive momentum and deepen integration (Buti et al. 2025, Revoltella et al. 2025).
Although the benefits of deeper capital market integration are widely acknowledged, evidence on its macroeconomic impact is still missing, and the transmission channels remain insufficiently understood (di Noia 2023). Our analysis (Caivano et al. 2025) takes a first step in closing these gaps.
The channels of greater capital market integration
We identify two channels through which greater capital market integration in Europe would affect macroeconomic variables.
The first channel is based on a ‘price effect’, which arises from higher risk diversification opportunities, higher market liquidity, and the availability of a safe asset.
Risk diversification opportunities expand because the default risk of assets issued across different countries is less correlated with any single domestic business cycle. This lowers the risk premium demanded by investors. Deeper integration also enhances market liquidity: harmonised rules on issuance, disclosure, and taxation would facilitate cross-border access to financial instruments, broadening investor participation. In addition, better integration of market infrastructures would simplify transactions and strengthen the functioning of secondary markets, thereby reducing liquidity premiums. Finally, the creation of a genuine European safe asset would improve the liquidity of the secondary market for government bonds and capture the convenience yield currently concentrated in the Bund. This, in turn, would lower the risk-free rate against which other financial instruments are priced.
Overall, these price effects would lower the cost of capital and stimulate the economy in a manner similar to a favourable credit supply shock. Drawing on existing studies, we estimate that the cost of capital in Europe could decline by roughly 50 basis points, with about half of this reduction attributable to the introduction of a common safe asset.
The second channel is based on a ‘quality effect’, that is, higher appetite for investing in the EU of both domestic and foreign investors with higher propensity for risk. A more integrated and easier to navigate financial ecosystem would attract, for instance, venture capital funds, thereby fostering investment in high-productivity projects. Both venture capital and foreign direct investment (FDI) generate substantial positive spillovers for domestic firms. Venture capital can stimulate innovation in established companies and support the creation of new businesses, while FDI can enhance the productivity and competitiveness of local firms.
Overall, the quality effect would bring in investors with a higher risk appetite; insofar as these investors are more skilled at identifying opportunities, the result would be a shift in the investment demand curve, similar to the impact of a positive TFP shock. Quantifying such effects is challenging, given the limited empirical evidence. Nevertheless, we provide indicative estimates under plausible scenarios – for example, considering the implications if this channel were to halve the current gap between Europe and the US in venture capital investment directed toward R&D.
Macroeconomic effects
We evaluate the macroeconomic effects of capital market integration on the economy by simulating a (quarterly) dynamic equilibrium model calibrated to the euro area. In the model, firms use two types of capital, physical capital and R&D. An important feature of the model is that the stock of R&D, differently from physical capital, affects the level of the firm’s total factor productivity (TFP). Thus, investing in R&D has positive supply-side effects on euro area production through both the accumulation of the R&D stock and the resulting higher TFP level. Based on the evidence in the literature, one euro invested in R&D generates an increase in GDP that is four times as high as the increase from one euro invested in physical capital. The calibration of the model reflects these differences in the rates of returns.
According to our estimates, greater European capital market integration would, through the price effect, generate an annual investment stimulus of about 1% of GDP. If this additional investment were directed exclusively toward physical capital, the impact on output would remain relatively modest: an extra 1% of pre-shock euro area GDP in investment would gradually raise output by up to 1.5% after ten years (see Table, column 1). By contrast, if investment were channelled into R&D (Table, column 2), the effects on economic activity would be far more substantial. In this case, the expansion of the R&D stock produces a persistent increase in TFP, which is 3% higher after ten years and 4% higher after twenty years relative to baseline. As a result, GDP rises by 4% after ten years and by 6% after twenty years – an average gain of 3.6% over two decades.
Regarding the quality effect, a back-of-the-envelope calculation suggests that if it were to halve the gap between Europe and the US in venture capital investments directed toward R&D, it could generate additional annual investments worth around 0.35% of European GDP, translating into a further 1.6% boost to GDP.
Table 1 Macroeconomic effects of higher investment generated by capital market integration
Conclusions
Capital market integration in Europe is key to boosting productivity and growth. It would lower financing costs for firms and attract private capital – including foreign capital – towards riskier, high-return projects. A European safe asset would enhance market liquidity and offer a common benchmark for the financial system. A general equilibrium model shows that an integrated financial market around a common European security could generate €150 billion in extra annual investment and boost GDP by 1.5%. The impact could triple if investments focus on high-tech projects, with quality effects adding up to another 1.5% of GDP.
Authors’ note: The opinions expressed in this column are those of the authors and do not necessarily reflect the views of the Bank of Italy.
References
Buti, M, M Messori, D Revoltella, D Vila (2025), “How large is the investment gap in the EU and how to close it?”, CEPR Policy Insight No. 141.
Caivano M, P Cova, K Pallara, M Pisani, F Venditti (2025), “The economic impact of European capital market integration”, Questioni di Economia e Finanza (Occasional Papers) No. 957, Banca d’Italia.
Di Noia (2023), “The giant missing piece in the EU’s capital market puzzle”, VoxEU.org, 15 May 2023.
Draghi, M (2025), The future of European competitiveness.
Letta, E (2024), Much More Than a Market – Speed, Security, Solidarity.
Nindl, E, L Napolitano, H Confraria, F Rentocchini, P Fako, J Gavigan, A Tübke (2024), “The 2024 EU Industrial R&D Investment Scoreboard”, 18 December.
Revoltella, D, T Bending, L Maurin, A Kolev, E Sinnott (2025), “Addressing European competitiveness: Investment, integration, and simplification”, VoxEU.org, 6 March.