Europe needs deeper financial markets to turn its savings into investment in defence, energy and productivity, a speech published on Oct. 27 by the Bank for International Settlements said.
Europe has strengthened its institutions over the past fifteen years but still trails Asia-Pacific in economic dynamism. The speech’s title is “Asia-Pacific and Europe - building resilience and growth in an age of geopolitics and fragmentation”.
Europe has savings but divides them among 27 national financial markets, limiting their use for productive investment. The EU’s Savings and Investments Union needs to be completed rapidly to help connect those savings with businesses and projects needing finance.
A common European safe asset, a security designed to retain value and trade readily, could help deepen markets and reduce financing costs. Its benefits would depend on its design, and creating it would ultimately require a political decision.
The speech assessed European resilience against Asia’s experience after the 1997–98 financial crisis and Europe’s response to more recent shocks. Asian economies strengthened reserves, built trade and investment surpluses with other countries and adopted floating exchange rates, helping them weather the crisis a decade later.
European banks withstood the pandemic, Russia’s war in Ukraine and the ensuing energy crisis because of supervision, capital cushions and policy action. But that resilience cannot be taken for granted.
Geopolitical conflict, climate change, concentrated financial exposure to artificial intelligence and rising public debt pose threats. A sharp fall in AI valuations could spread across markets, while higher borrowing costs could expose weaknesses linked to government debt.
AI investment could eventually deliver large productivity gains, but Europe must adopt the technology more widely. AI-related investment and trade already support many Asian economies.
The Middle East war had raised energy prices and inflation, although higher prices had not yet spread to other goods or wages. European growth was relatively solid, supported by defence and infrastructure spending and stronger-than-expected household consumption.
Europe needs greater responsibility for its defence and less dependence on imported fossil fuels. It needs investment in renewable and nuclear energy, alongside fewer barriers within the single market and more spending on innovation and skills.
Closer trade ties with Asia-Pacific could support growth, diversify supply chains and strengthen economic security. Continued central bank cooperation through the IMF and BIS and support for an open trading system governed by shared rules are also needed.
