There is a common perception that Europe has plenty of savings, but invests those savings elsewhere, particularly in the United States. The perception influences both political and academic discussions. But the evidence tells a different story. Taking market size into account, European insurance companies and pension funds (ICPFs), which pool the long-term savings of millions of Europeans, actually overinvest in the European Union.
In other words, EU ICPFs exhibit significant home bias. The home bias concept captures whether investors overweigh their own countries in their investment portfolios, relative to the global market size. Most investors, to various degrees, exhibit home bias. EU ICPFs are no exception and in fact underinvest in the US, relative to the size of its market.
Does this negate the claim that there is an ‘outflow’ of European savings to the US? No – but the current level of outflow does not have to be a major concern. While the EU ICPF sector holds about as much listed equity in the EU as it does in the US, the sheer size of the US market warrants a large share as well. In addition, performance of US stocks has been much stronger historically. If the goal of ICPF investment is to ensure the financial security of EU households, it cannot disregard the US.
The more important question is why the US market is so much bigger than the European market. To keep more EU savings at home, policymakers should focus on policies that enable higher and more reliable returns for savers, making the domestic market more attractive. There are various proposals to encourage investment in the EU, such as creating an attractive savings product accessible for all EU citizens. Access to investing is also important – the limited financial market participation of retail investors in Europe has been a well-known problem for decades. This situation can be improved by promoting financial literacy.
Meanwhile, policies that help increase the coverage of funded pensions, still very limited in many EU countries, would contribute to a larger investable pool of savings to finance the real economy. However, policy priorities must be clear. Any reform targeting retirement savings needs to put savers first. More financing for the real economy is then likely to follow.
The Bruegel working paper, ‘Plugging Europe’s investment gap: understanding the potential of leveraging institutional investors’, by Marie-Sophie Lappe and David Pinkus, is available at https://www.bruegel.org/working-paper/plugging-europes-investment-gap-understanding-potential-leveraging-institutional.