European Savings Flow to US Not a Major Concern, Experts Say
Brussels – Concerns over a significant “outflow” of European savings to the United States may be overstated, according to new analysis from Bruegel, a brussels-based think tank. While European Institutional Collective Pension Funds (ICPFs) do invest in the US market, this aligns with the US market’s size and ancient performance, and doesn’t necessarily indicate a problematic capital drain.
The analysis acknowledges the existence of “home bias” – the tendency for investors to favor domestic markets – and notes that EU ICPFs exhibit this bias, actually underinvesting in the US relative to the size of its market. Though, the report emphasizes that the US market’s substantial size warrants a significant share of investment, notably given its historically “much stronger” stock performance.
Rather than focusing solely on stemming the flow of capital, policymakers should prioritize policies that boost returns within the EU, making the domestic market more attractive to savers. Proposals include creating a pan-EU savings product accessible to all citizens and improving financial literacy, addressing a “well-known problem for decades” of limited retail investor participation in European financial markets.Increasing coverage of funded pensions,currently limited in many EU countries,would also expand the pool of investable savings. The Bruegel report stresses that any retirement savings reform must prioritize the needs of savers, with increased financing for the real economy expected to follow.
The findings are detailed in the Bruegel working paper, ‘Plugging Europe‘s investment gap: understanding the potential of leveraging institutional investors,’ authored by Marie-Sophie Lappe and David Pinkus, available at https://www.bruegel.org/working-paper/plugging-europes-investment-gap-understanding-potential-leveraging-institutional.
