Cross-border investors keep European firms resilient during crises

During major economic shocks, businesses often pull back on investment to preserve cash. However, Euro area companies whose shareholders were spread across multiple countries cut their capital spending far less during the Covid-19 crisis than those reliant on domestic investors, according to a working paper published by the European Central Bank.

The finding highlights how fragmented financial markets leave businesses vulnerable. When local investors face economic stress at home, their capacity to support domestic firms shrinks. By contrast, international investors draw on capital reserves from unaffected regions, providing a buffer when domestic credit tightens.

Sceptics of deeper financial integration rightly point out that cross-border capital can sometimes be volatile, fleeing at the first sign of national instability. Yet the ECB research shows that equity investment behaves differently during widespread downturns: geographically diversified shareholders help absorb local shocks rather than amplifying them.

Europe can build a far more shock-resistant economy by completing its long-delayed Capital Markets Union. Tearing down remaining national barriers to cross-border equity flows is not an abstract exercise for financial centres. It is a practical step that protects jobs and keeps European companies investing when the next crisis arrives.