Europe’s bank-based financial system struggles to fund risky startups. These startups often work with new technologies and business ideas that banks find hard to evaluate.
According to IMF researchers Nathaniel Arnold, Guillaume Claveres, and Jan Frie, the value of startups is usually in their people and ideas, which can’t be used as collateral for bank loans.
“Banks are limited by regulations that rightly restrict lending to risky firms without collateral, even if they are fast-growing and likely to be profitable in the future,” the researchers said.
They also found that the European Union (EU) faces a productivity issue.
According to their findings, Europeans produce nearly 30 percent less per hour worked compared to what they would have if their productivity had increased at the same rate as in the United States since 2000.
The researchers noted that a key reason for the bloc’s weak productivity growth is the failure to grow innovative startups into “superstar” firms.
They explained that Europe’s fragmented economy and financial system contribute to this issue.
Without a smoother single market for goods, services, labor, and capital, it becomes more costly and challenging for successful startups to expand.
