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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a professor of economics at SOAS University of London
Europe, the joke runs in Brussels, is permanently at a crossroads. But this time, it seems existential as the region faces the challenge of fickle allies and stronger economic competitors in a world of rapid technological change.
The European Commission’s way out? A triple transformative imperative: close the innovation gap, make a joint effort to decarbonise while boosting competitiveness, and reduce excessive security dependencies.
Yet transformation has a price tag. The report by former Italian prime minister and European Central Bank president Mario Draghi last year estimated a minimum of €750bn-€800bn of additional investment yearly by 2030. Throw in a few more billions for rearmament and we get to the toughest political question in Europe: How do we pay for transformation? With limited fiscal space, Europeans have a new plan: the Savings and Investment Union.
European savers, SIU proponents claim, need to behave a bit more like the Americans. If they matched Americans’ appetite for capital markets, Christine Lagarde of the ECB calculated recently, some €8tn currently “trapped” in bank deposits would be unleashed to finance transformation. It is pitched as a win-win scenario where retail savers get access to higher-yield financial instruments, and businesses to investible capital. “More investment, more investors’, to quote the latest annual letter of Larry Fink of BlackRock, is now a north Atlantic consensus.
There are misconceptions in the SIU plans. First, Europe doesn’t have €8tn of savings “trapped” in bank deposits that could easily be deployed. Euro area bank deposits — including those made for set terms — were around €15tn in 2024, according to my estimates. That suggests the ECB seems to think European banks could easily lose half of their stable retail funding sources.
The reason why Europeans hold one-third of their financial assets in bank deposits, compared with one-tenth in the US, lies in the denominator: Europe hasn’t privatised pensions at the same pace as the US. Our main safety net for old age remains the state, not financial markets. In the US, pension assets to GDP reached about 130 per cent in 2023. Excluding outliers Denmark and Netherlands, where that ratio is higher than in the US, most EU countries — France, Germany, Austria, Romania, Greece, Spain, Italy — cluster below 20 per cent.
A second misconception is that the SIU solves a shortage of investible capital. But there is already a global glut of it. Just look at dry powder in the private capital industry. By recent estimates by Morgan Stanley, there is approximately $4.5tn of investible capital sitting around unproductively — $9tn if you factor in leverage — a quarter of it raised more than 3 years ago. The real shortage is of investible projects that offer the risk-adjusted returns that financiers want.
If the SIU is to match the US on savings going into investments, European authorities would have to further dismantle state pensions, curtailing spending on them. The Deutsche Börse Group paper on the SIU makes that clear. It calls on national state pension systems to be “less pay-as-you-go and more capital-orientated”, warning of a “dark picture” of the EU spending 12.8 per cent of GDP on public pensions in 2040.
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But pension privatisation is a false economy for both the public purse and for European citizens. If Europeans were to save like the Americans, they may have to live like them too, with a shrinking welfare state and a social contract increasingly in the hands of private equity firms and other asset managers that invest large chunks of pension capital.
American-style finance, if you follow the money, inevitably produces a privatised model of welfare. As pensions swelled into trillion-dollar asset pools, asset managers, and private equity in particular, promised attractive returns by turning social infrastructure into investable asset classes. Today, this could be a plausible scenario in European capitals seeking to meet Nato spending commitments.
All this means a quiet erosion of the social contract. In its place will come the American model: more housing, hospitals, care homes, even the pipes in the ground, becoming assets on a private equity balance sheet, ruthlessly milked for yield.
The SIU may be a genuine attempt to resolve difficult financing questions. But its ambitions to rewire Europe’s financial system into the American model will have far-reaching consequences for pension and welfare provision. These are political choices that should be debated democratically, not hidden in technocratic agendas of “financing gaps”. European citizens deserve nothing less.
