Page 19 - Policy Economic Report -August 2026

POLICY AND ECONOMIC
OIL & GAS MARKET

flow more efficiently towards productive companies and projects across countries, while broader access
to lenders could reduce financing costs for businesses. The gains would be particularly important for
smaller economies and younger companies that currently face greater difficulty accessing capital beyond
their domestic markets.

Further reforms aimed at facilitating cross-border venture capital investment and expanding the supply
of long-term risk capital could increase the estimated gains from financial-sector reforms to
approximately 3 per cent of EU GDP over the long term. This would require reducing legal and tax-related
barriers to cross-border investment, expanding the participation of pension funds and insurers in risk-
capital markets, and strengthening equity financing. Such measures could improve diversification for
investors while providing innovative firms with greater access to the capital required for expansion.

The IMF emphasizes that financial-sector reforms would be most effective when combined with broader
measures to improve business dynamism and innovation. A stronger business environment, greater
investment in skills and research and development, and policies that make it easier to start and scale
companies would increase the supply of viable investment opportunities. When combined with deeper
financial integration, these reforms could generate substantially larger long-term economic gains, with
the IMF noting that the combined impact could lift GDP by more than 10 per cent.

The reforms identified by the IMF centre on three broad priorities. First, Europe needs to advance banking
union by reducing regulatory and institutional differences, harmonising insolvency frameworks and
completing the financial safety net, including through a European deposit-insurance mechanism. Second,
venture capital and equity financing need to be strengthened by expanding long-term risk capital and
reducing barriers to cross-border investment. Third, improvements in the broader business environment
are required to ensure that newly available capital is channelled towards productive and innovative firms.

The need for such reforms has become more pressing as Europe faces weaker potential growth, rising
technological competition and increasing geopolitical fragmentation. Deeper financial integration could
not only improve the allocation of capital and raise productivity, but also strengthen economic resilience
by allowing risks to be shared more effectively across countries. The IMF's broader analysis similarly finds
that reforms addressing financial-market fragmentation can reinforce the gains from structural reforms
aimed at improving productivity and business dynamism.

Overall, the IMF's assessment highlights that Europe's challenge is not a shortage of savings, but the
inefficient connection between available savings and productive investment opportunities. Removing
barriers to cross-border banking, expanding venture capital and improving the business environment
could help unlock this capital, support innovative firms and strengthen Europe's long-term growth
potential. In an environment of heightened geopolitical and economic uncertainty, deeper financial
integration could therefore serve not only as a source of additional growth but also as an important
mechanism for strengthening Europe's economic and financial resilience.

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