Wed. Jan 26th, 2022

Europe’s largest companies have struggled to keep up with the pandemic. Only 10 of the 100 biggest winners in terms of market capitalization growth over the past two years – and only one of the top 10 – comes from the EU. Even when the UK and Switzerland are included, the number rises to just 14.

It’s not just a Covid phenomenon, it’s rather part of a shocking and long – term decline. In 2000, the enterprise value of large listed companies in Europe was almost on a par with American competitors. By late 2021, American groups were worth more than twice their European counterparts – $ 46tn vs $ 21tn – according to McKinsey research. Major technology firms such as Alphabet, Meta, Apple, Amazon, Tesla and Microsoft have contributed almost half of the gap in market capitalization.

Some industries where Europe dominated in 2000 – telecommunications and insurance – grew slowly. But the continent’s entrepreneurs have struggled to reach scale. More than 40 companies, now worth more than $ 100 billion, have been established over the past 50 years. Only one was based in Europe.

Americans like to boast of a superior culture and lighter regulations. But barriers have made it harder for European companies to reach real scale and compete globally. The most important is access to capital. Mature US capital markets mean companies can sell large amounts of debt and shares, while European companies have to rely more on bank loans, which hurt them during and after the financial crisis.

Brussels has been talking for years about capital markets union, which will standardize rules that make it easier for companies to exploit investors from across the block. Progress remains slow and Brexit has split rather than united markets. That needs to change.

European technology groups spend far less on research and development than large American groups, making them more likely to fall behind with revolutionary technology. Despite the internal market, they face language and regulatory barriers when leaving their home countries. Nationalist sentiment has sometimes prevented essential cross-border consolidation. The continent’s economy also expanded more slowly than that of China or the USA. All of these factors are an obstacle to growth and a deterrent to investors.

As the EU seeks to encourage corporate growth, it will face a difficult balancing act. Many Americans now believe that big technology companies have had too much freedom to buy potential competitors. The EU was rightly more protective of competition, and it must be careful not to lose that sense of skepticism altogether in the interest of creating continental champions. Similarly, excessive prescriptive standards and rigid labor laws have hampered growth in some sectors; but unlimited capitalism has a very ugly side, so a reformed approach must be carefully considered to be sustainable.

Change may come. After years of lagging behind the US and Asia, European start-ups are finally attracting more venture capital and growth capital. Investment rose 142 percent last year to $ 93 billion, surpassing the rest of the world, according to CBinsights. There was a visible boom in entrepreneurship in many European cities, and a record of 63 companies crossed the $ 1 billion valuation threshold in 2021, even though it was still the US 304. Stock market listings and sales of European start-ups also peaked.

The EU and the UK have a new chance to build future world champions. To capitalize on this, they must find ways to strengthen public markets, facilitate cross-border expansion, and carefully reform rules on competition, employment, and governance.

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