A decade after the financial crisis began, capitalism, a social arrangement designed to help people by providing capital for companies to innovate, grow and create jobs, is still failing. The crisis starved the economy of capital.
As well as leading to calls for greater protectionism, this failure poses a clear and present threat to the economic future of Europe itself: the EU is creating neither the companies, nor the jobs, of tomorrow. While 60 per cent of the world’s most valuable companies come from America, less than 15 per cent come from Europe - down from 30 per cent a decade ago. And China is catching up fast.
With youth unemployment close to 20 per cent, time is running out to reform the EU economy so that it works for all 500m citizens. The public sector can no longer provide increasing numbers of jobs, while big corporates have not created net new jobs since the crisis.
But Europe does have more small and mid-sized companies than it does unemployed people. The most dynamic of these boast two-year job creation rates above 40 per cent and compound growth of 100 per cent.
Their potential to transform the European economy is obvious.
We must address Europe’s deteriorating record at developing dynamic start-ups into the major global companies of tomorrow. The European corporate funding system is efficient for big companies that rely mainly on debt to manage their obligations. But it is fundamentally ill-suited to helping the companies best positioned to drive economic growth and create new jobs.
Dynamic start-ups and SMEs in receipt of a bank loan must prioritise managing that debt or risk default. They need long-term investment so that they can use capital to innovate and grow.
However while €570bn of UK and European taxpayers’ money was spent subsidising tax-deductible corporate debt last year, every euro of equity was taxed up to four times.
This is a clear illustration of who capitalism currently works for. And the debt bias also explains why the cause of the crisis was the same as it has always been - over-leverage in the banking system.
For an economy to work for everyone, capital must flow bottom up: from investors to innovators and small businesses, instead of being concentrated top down from the central bank through a few banks to established companies.
Because if the growth potential of SMEs is clear, the potential of equity is even clearer. London’s capital market for high-growth companies, Aim, has raised €114bn for nearly 4,000 companies in two decades.
Those listed are five times more likely to export than the national average. As SMEs are highly innovative (the thousand fastest growing in Europe count nearly 8,000 trademarks and patents between them), they create high-quality jobs, boosting productivity.
As the US unveils measures to further boost capital , Europe needs to move fast. Capital markets union is vital. It will simplify access to multiple sources of finance for SMEs, including accessing non-EU capital.
Despite Brexit, London has a vital role to play. Last year 76 per cent of capital raised across European growth markets was on Aim, with market capitalisation averaging nearly €100m. Our pan-European business development programme - Elite - helps hundreds of high-growth potential companies develop and access capital, while our global liquidity pool for clearing saves customers billions in regulatory capital (deployable in the real economy instead).
By recalibrating the tax system to give alternatives to debt finance a chance, we can drive economic growth but in a way that benefits the many, not the few - ultimately saving capitalism itself. Europe will be judged on its capacity to create jobs for its citizens.