Europe Investment Report 2015 — Liquidity Without Formation

Europe began large-scale asset purchases in 2015, roughly six years after the United States. The delay is worth dwelling on because it shaped everything that followed.

The programme worked in the terms it was designed for. Sovereign yields fell, in several cases below zero. The currency weakened, supporting exporters. Bank funding costs dropped. Financial conditions eased measurably.

What it did not do was produce a corresponding increase in company formation or growth-stage investment, and the gap between the monetary easing and the real-economy response is the central fact about European investment in this period.

The explanation is structural rather than cyclical, and it has two parts.

First, Europe's financial system is bank-based. In the United States, a large share of corporate financing comes from capital markets — bond issuance, equity, and a deep non-bank lending sector. In Europe, banks dominate. That means monetary policy transmits through bank balance sheets, and a bank that is repairing its own capital position after a crisis does not expand lending simply because its funding cost has fallen.

Second, Europe's constraint on growth was never the price of capital. It was fragmentation: a single market in principle, operating across many distinct regulatory, tax, insolvency, employment and language regimes in practice. A company scaling across Europe pays a cost that a company scaling across the United States does not, and no interest rate changes that.

Both problems were identifiable in 2015. Neither was addressed by the policy instrument that was deployed.

Why bank-based transmission is different

The distinction between a bank-based and a market-based financial system is not a technicality. It determines who benefits from monetary easing and how quickly.

In a market-based system, a central bank buying government bonds pushes the holders of those bonds into other assets — corporate bonds, equities, private credit. Corporate borrowing costs fall directly, because the corporate bond market reprices. A company that can issue bonds sees its cost of capital fall within weeks, without any bank being involved.

In a bank-based system, the same purchase lowers the bank's funding cost. Whether that reaches a borrower depends on the bank's willingness to lend, which depends on:

• Its capital position. A bank rebuilding capital after a crisis has an incentive to shrink its balance sheet, not expand it. Cheaper funding improves its margin rather than its lending appetite.
• Its existing loan book. A bank carrying non-performing loans from the previous cycle is managing those before it seeks new exposure.
• Regulatory capital treatment. Post-crisis rules made certain lending more capital-intensive, which raised the effective cost of extending it regardless of funding cost.
• Demand. A business that does not see growth opportunities does not borrow to fund them, whatever the rate.

Every one of these was binding in Europe in 2015. Bank capital positions were still being rebuilt, non-performing loan stocks remained elevated in several economies, and demand was weak.

A rate cut in a market-based system reprices the asset directly. In a bank-based system it reprices the intermediary's funding, and the intermediary decides whether to pass it on. Those are different mechanisms with different reliability, and Europe was operating the less reliable one.

The consequence for investors was that European monetary easing supported asset prices — which repriced immediately — considerably more reliably than it supported the real economy, which depended on bank behaviour.

The fragmentation cost

Europe's structural constraint on company growth is fragmentation, and it operates in a way that is easy to state and consistently underestimated.

The formal position is a single market with free movement of goods, services, capital and people.

The operational position for a company attempting to scale across it involves:

• Regulatory regimes that differ by country in financial services, healthcare, employment and consumer protection — the areas where most software businesses operate.
• Tax regimes that differ, requiring separate structures, filings and advice.
• Insolvency law that differs, which matters enormously for lenders and for the restructuring of failed companies — and therefore for what risk anyone will take.
• Employment law that differs, which affects hiring, termination costs and equity compensation.
• Language and market convention that differ, requiring localised product, sales and support.
• Payment infrastructure that differs, though less than in the fragmented markets described in the Southeast Asia reports.

The economic consequence is the one set out in the Southeast Asia Venture Report 2018, and it is the same mechanism: costs that are fixed in a single large market become costs that repeat per country.

A US company reaching a market of a few hundred million people does so under one regulatory regime, one tax code, one insolvency framework, one employment law and one language. A European company reaching a comparable population crosses all of those boundaries.

This is why European companies are frequently strong at seed and weak at scale. Building a product for a domestic market is not harder in Europe than anywhere else. Scaling it across the continent is, and the difficulty is structural rather than a failure of ambition.

Equity culture and the pension question

A second structural difference compounds the first, and it concerns where domestic risk capital comes from.

A venture ecosystem needs domestic institutional capital. As the Asia-Pacific Investment Report 2025 argues, domestic capital is more stable than foreign capital because its liabilities are local — it does not withdraw when conditions elsewhere change.

Europe's domestic institutional capital was structurally under-allocated to venture, for identifiable reasons:

• Pension systems differ in structure. Where retirement provision is largely state pay-as-you-go rather than funded, there is no large pool of long-dated private capital seeking returns. The countries with the largest funded pension pools are not the countries with the largest technology sectors.
• Regulatory capital treatment penalised the asset class. Insurance capital rules assign high capital charges to equity and to unlisted holdings, which makes an insurer's allocation to venture expensive in regulatory capital terms regardless of its return.
• Household savings sit disproportionately in deposits and property rather than in equities, which limits both the retail channel and the political constituency for equity markets.
• The exit market was thin, which as the Asia-Pacific Investment Report 2019 argues, directly reduces achievable return and therefore the case for allocating at all.

These reinforce each other. Thin domestic capital produces thin exit markets, which produces lower returns, which justifies the low allocation. It is a stable equilibrium of the kind the Japan Investment Report 2019 describes — an inefficiency protected by structure rather than one being missed.

Breaking it requires changing the structure, which is a policy question rather than a market one. That is why the European capital markets debate recurs in every subsequent report in this sequence.

What the money actually did

If monetary expansion did not produce company formation, it is worth being specific about what it did produce, because the effects were real.

It supported asset prices. Sovereign bonds, corporate bonds and equities all repriced. This benefited existing asset holders and did nothing directly for anyone else.

It weakened the currency, supporting exporters. For an economy with a large manufacturing export sector this is a substantial channel, and it operated.

It reduced sovereign borrowing costs dramatically, which relieved fiscal pressure on the most indebted member states. This was arguably the programme's most important achievement and it is under-credited, because it prevented a problem rather than solving a visible one.

It intensified the institutional yield problem. As the Global Investment Outlook 2016 describes, negative yields on the safe portion of a portfolio force institutions to take more risk or accept a shortfall. In Europe this pushed capital toward private markets, real assets and credit — the same shift the Private Equity Report 2015 documents globally.

It did not repair bank lending at the pace required, which is the transmission failure described above.

The asymmetry is the lasting point. Monetary policy reliably moves asset prices, because asset prices are set by discounting and the discount rate is what policy sets. It moves real activity only through intermediaries whose behaviour it does not control. In a bank-based system with impaired banks, the second channel is weak and the first is not — which produces exactly the pattern Europe experienced.

The growth-stage gap, already visible

The problem that the Europe Venture Capital Report 2019 names as defining was identifiable in 2015 and was not the focus of attention.

The pattern: European seed formation was healthy. Talent was strong, costs were lower than in the United States, and early-stage capital was adequate. Companies were being founded and funded at seed in numbers comparable to their addressable markets.

The failure was at growth stage. A European company that succeeded at Series A frequently could not raise a large Series B or C domestically. The available options were:

• Raise from US investors, which was possible and frequently came with pressure to relocate the company's centre of gravity.
• Sell early, to a strategic acquirer, at a valuation far below what a US company at the same stage would have commanded.
• Grow more slowly, funded by revenue, in a market where competitors were not so constrained.

Each of these is a value transfer out of Europe. A company sold at Series B captures a fraction of the value it would have created had it scaled independently, and the remainder accrues to the acquirer.

Why the gap existed connects both structural arguments above: domestic institutional capital was thin, so there were few large European growth funds; and the exit market was thin, so the returns that would justify raising such funds were harder to achieve. The gap was a symptom of the equity-culture problem, not an independent phenomenon — which is why it proved so persistent, reappearing in 2019 and again in 2023.

What an allocator could act on

Distinguish asset price effects from real economy effects when assessing a policy programme. European asset repricing in 2015 was reliable and immediate. Real economy transmission was contingent on bank behaviour. An investor positioning for the second on the evidence of the first was making a category error.

Assess bank health before assuming credit transmission. Capital positions, non-performing loan ratios and lending survey data are published free by the ECB and national supervisors. In 2015 they said clearly that transmission would be impaired, and they say the same thing about any subsequent episode.

Price the fragmentation cost into European growth models. A company scaling across Europe carries costs that repeat per country. Applying a US margin assumption to a European business overstates the achievable outcome, exactly as applying a single-market assumption to a Southeast Asian business does.

Weight the exit route heavily. Europe's thin exit market reduces achievable return independent of operating performance, through all three channels the Asia-Pacific Investment Report 2019 identifies: longer time to exit, lower achievable valuation, and lower probability of any exit.

Watch domestic institutional allocation as the leading indicator. European venture's structural constraint is the absence of stable domestic capital. Pension and insurance allocation to the asset class — disclosed in annual reports and tracked by Invest Europe — is the series that would signal genuine change, and it moves slowly enough to be a useful early signal.

Recognise the equilibrium. Thin capital, thin exits, low returns and low allocation reinforce each other. That is a structure, not a market failure that competition will correct, and it changes only through a change in the rules — which is why the capital markets debate recurs throughout this sequence.

What 2015 established for Europe

• Bank-based transmission was demonstrated to be weaker and slower than market-based transmission, particularly with impaired bank balance sheets.
• Liquidity was shown not to create company formation — the constraint was never the price of capital.
• Fragmentation was established as the structural cost on European scaling, operating through costs that repeat per country.
• The domestic capital equilibrium was identified: thin capital, thin exits, low returns, low allocation, each reinforcing the others.
• The growth-stage gap was already visible, four years before it was named as the defining problem.