The demand for sovereignty, whether digital, technological, energy, food or medical, has imposed itself – at least in discourse – as a priority. It is obvious that Europe has become extremely dependent on others to access services and goods deemed essential. However, the last few years have shown how problematic dependency can be when the context changes radically under geopolitical or health pressures. The conclusion therefore seems unanimous. On the other hand, the proposals do not seem to measure the extent of the problem, namely the vertiginous lack of capital in Europe.
Digital addiction is not a myth. It is even extreme. Without surprise, the digital dependency index (DDI) published by the University of Bonn assesses the degree of dependence of Europe at around 0.8 (0 for total independence and 1 for absolute dependence). It is a very strong dependence, foreign digital technologies being in our dominant position. Similarly, Europe has paled in comparison to the United States in the race for the flash production of vaccines against Covid-19. Two American companies, benefiting from a complete innovation funding ecosystem from venture capital to the stock market, were able to release vaccines in record time. On the telecom side, the same observation. Europe appears to be lagging behind the United States and major Asian countries when it comes to next-generation networks like 5G.
However, this dependence is closely linked to the lack of capital. In the first industrial revolution, the good positioning of Great Britain and France was linked to the existence of a significant stock of savings and its drainage in favor of the construction sites of the time, which whether infrastructure (canals, railways, etc.) or industry. It is this stock of long-term savings that is sorely lacking today to finance the “investment walls” necessary for innovation in communication and information technologies, energy transition, medical innovation.
Drain savings towards future projects
According to our calculations at the Molinari Economic Institute, Europe lacks 10,400 billion euros in market capitalization. The market capitalization of companies represented 70% of GDP at the end of 2020 in the EU, compared to an average of 147% in the OECD. So far, Europe has refused to deal with this structural problem. It multiplies the palliatives in the form of innovation support plans, of necessarily limited scope, or projects aimed at imposing new sharing of value. In particular, Europe plans to make the big digital players pay to finance struggling telecoms.
All these approaches miss the crucial question: how to channel European savings towards future projects? The abundance of savings amplified European growth in the years 1890-1914, marked by the boom in chemicals, electricity, automobiles, and then aeronautics. The shortage of long-term savings explains our decline today and the insolent success of the United States and a whole series of countries.
If South Korea shows relative numerical independence, it is because, like the‘explain Maximilian Mayer, author of the indicator and professor of international relations, “The South Korean government began in the 1980s to invest in information and communication technology (ICT) through massive investments and targeted in basic research.” Market financing of companies then took over, in a country where the market capitalization of companies represented 132% of GDP at the end of 2020, i.e. double that of Europe.
At the end of 2022, the total capitalization of stock exchanges in the European Union (EU) was 9.9 trillion euros. It was four times lower than that of the American stock exchanges (37,700 billion euros for the NYSE plus the Nasdaq). The EU’s leading stock exchange, Euronext, was four times smaller than the NYSE (traditional US stocks) and three times smaller than the Nasdaq (tech stocks).
Lack of pension funds
If Europe is late, it is because the pension funds, which hold 30% of the 100,000 billion dollars placed on the stock market, are lacking. Compared to the OECD average, there was a shortfall of €8.9 trillion in long-term savings at the end of 2020 in the EU. Pension funds represented 34% of GDP at the end of 2021 in Europe, compared to an average of 100% in OECD countries.
Long-term players, with capital invested for years or even decades, pension funds play a major role worldwide in supporting innovation. They make it possible to finance long “detours of production”, with projects promised to a bright future which will not be profitable for years.
The lack of innovation in Europe is not a problem of skills, the tools and know-how being there, but the consequence of a problem of outlets, linked to the scarcity of long-term savings, following a series unwise regulatory choices that have made retirement savings rare. While in the world, the development of a significant proportion of retirement benefits is financed with collective or individual capitalization, based on capital invested in part in the local economic fabric, the EU benefits less from this windfall.
Pension plans – long-term investors – cannot be replaced by state support plans or more or less informed attempts to modify the distribution of value. Given the financial masses needed to invest in technologies capable of supporting current societies, it is illusory to hope for independence and development without capital. There is an urgent need to rethink pension schemes by adding a dose of collective capitalization wherever it is lacking. It is necessary for savings, innovation and future retirees.