Europe must deepen capital markets to stay competitive, Oesterreichische Nationalbank Governor warns at Vienna forum

During the Host Country Keynote Speech at the FT Live Central and Eastern European Forum in Vienna on Tuesday, Martin Kocher, Governor of the Oesterreichische Nationalbank spoke about how Europe needs stronger and deeper capital markets if it wants to stay competitive in a world that is becoming more tense and unpredictable. 

Since 2021, Europe has been contending with a period of overlapping economic and geopolitical shocks. He asked, “How can Europe unlock growth potential in a world of geopolitical and economic tensions? A world in which Europe may find itself increasingly squeezed between the United States and an Eastern economic bloc?”

There is particular attention on the financial systems in Central, Eastern, and South-Eastern Europe. Kocher described banking systems there as being on “a solid footing” with “high capitalisation, robust profitability, and low levels of non-performing loans.” At the same time, private sector deposits significantly exceed private sector credit in several countries. Kocher called this “a deposit overhang or a credit shortfall,” and added that the gap may be an indication of structural constraints that banks cannot resolve on their own.

Stronger and more developed capital markets may also prove essential for the region’s long-term growth. Kocher argued that banking systems alone cannot support the scale of investment required for innovation and financing needs across CESEE economies, saying that “well functioning capital markets are an essential complement both for the region itself and for the European Union as a whole.” He added that this will not mean replacing banks, instead explaining that “a financial system built on both pillars can achieve better risk sharing, greater resilience, and more diversified funding conditions.”

There are also broader macroeconomic implications, as stronger capital markets can enhance the effectiveness of monetary policy and strengthen Europe’s position in global finance. Kocher said that capital markets “play an important role in ensuring effective monetary policy transmission.” He emphasised that Europe must remain outward facing, explaining that deep and liquid markets can “attract international investors” and ultimately support “a stronger international role for the euro.”

Kocher believes that improvements under the Capital Markets Union initiative have been “slow, fragmented, and at times lacking a coherent strategic direction.” However, he acknowledged that meaningful steps have been taken. Specifically, he pointed to new rules that enable instant payments without additional charges and other reforms that are designed to shorten the settlement cycles of securities. He also noted that transparency has been improved through the creation of the European Single Access Point, which will “provide centralised electronic access to information relevant for capital markets and sustainability.”

In addition, there has been a good amount of bottom-up progress across CESEE countries. Kocher mentioned a memorandum of understanding among eight countries that aims to “improve liquidity, align rules, and enhance visibility,” supported by the European Bank for Reconstruction and Development (EBRD). National governments, he added, can further support development by removing unnecessary barriers and improving pension and tax frameworks.

“Europe’s share of global capital markets has declined,” Kocher warned, even as EU markets have grown relative to GDP. In the CESEE region, “corporate debt markets remain small relative to GDP, and a large share of securities is held by non-residents,” he added. 

Europe needs “deeper, more liquid, less fragmented, and innovation-friendly capital markets” if it wants a resilient and competitive economy that fully includes Central, Eastern, and South Eastern Europe.