Yves hete. One wonders why the US has produced more multinationals than Europe. Arguably, Europeans more or less had to start over after World War II, but that argument cuts both ways. When I was in business school in the early 1980s, one of the reasons given for German and Japanese automakers eating the lunch of the Big Three was that they had newer infrastructure and manufacturing plants. This analysis makes a case that is intuitively appealing. First is that the EU is less a European single market than is believe, that there are frictions in trying to deal across the EU that are not present to the same degree in the US, which is a national market. Second, the US has a real advantage in its lower cost of capital.
By Bo Becker, Cevian Capital Professor of Finance in the Department of Finance Stockholm School Of Economics; Efraim Benmelech, Henry Bullock Professor of Finance & Real Estate and Director, Crown Family Israel Center for Innovation and the Guthrie Center for Real Estate Research Northwestern University:, and Joao Monteiro, Assistant Professor Einaudi Institute For Economics And Finance. Originally published at VoxEU
In 2008, the US stock market was worth $3 trillion more than the combined European stock market; in 2023, the gap was $34 trillion. This column argues that the valuation gap is not driven by differences in GDP, number of listed firms, sectoral composition, or the presence of a few superstar firms, but by European firms’ inability to scale. European firms remain tethered to their home market. Small European firms face a much larger cost of capital and cannot substitute debt with access to equity financing, including venture capital. Therefore, even if they have profitable growth opportunities, European firms cannot grow as their US counterparts.
Europe’s lacklustre economic performance has become a centrepiece of European economic policy. The Draghi Report (2024) report on European competitiveness warned of a “slow agony” of decline and placed the financing of young, fast-growing firms at the centre of the diagnosis (Draghi 2024). Adilbish et al. (2025) link Europe’s productivity weakness to a shortage of dynamic young firms and a surplus of mature, small, underperforming ones. Cerdeiro and Rotunno (2026) show that a fragmented single market – with internal barriers estimated at two to three times those between US states – holds back firms that might otherwise expand, and Lerner (2026) documents that European venture capital investment is only a fraction of the American level. Garnier (2026) argues that Europe’s problem is less a ‘flight’ of savings abroad than a failure to channel them into equity. Rogoff (2025) documents the evolution of total stock market capitalisation in Europe and in the US and Reichardt and Reis (2026) show that the productivity gap between Europe and the US is explained by the higher efficiency of the US financial market.
A $34 trillion Divergence
In a new paper (Becker et al. 2026), we document and explain the causes behind this divergence using aggregate stock market data together with firm-level balance sheet data between 2008 and 2023. As we show in Figure 1, in 2008, the total value of US-listed firms exceeded that of European firms by about a third – roughly $3 trillion. By 2023 the gap had grown to $34 trillion, an amount larger than annual US GDP. Over this period the US stock market quadrupled in value, while Europe’s rose by just 70%.
Figure 1 US-Europe valuation gap
This is not simply a story about the US economy being bigger. Scaled by GDP, the divergence is if anything sharper. US stock market capitalisation rose from 78% of GDP in 2008 to 177% in 2023; Europe’s inched up from 43% to 63%. Whether measured in dollars or relative to the size of the economy, European equity markets have been left far behind.
It Is Not What You Might Think
The instinctive explanations for these numbers turn out to be wrong. The gap is not the work of a handful of US superstar firms – excluding the largest 1% of firms in each region leaves the picture essentially unchanged. It does not reflect European champions decamping to list in New York – reassigning firms to the location of their headquarters barely moves the gap. It is also not driven by the fact that there are more firms in the US – the valuation gap is driven by differences in the value of the average firm in both regions. Nor is it a matter of sectoral composition – the average US firm is worth more than its European counterpart even within narrowly defined (four-digit) industries, and controlling for firm characteristics such as size and assets widens rather than narrows the gap. Differences in aggregate fundamentals – GDP, interest rates, exchange rates and risk premia – account for only a small slice of it.
What remains is a valuation gap: the average US firm is simply worth much more than a European one, and the difference has grown. It is largest among younger firms – between 2008 and 2023 it widened by 82% for the youngest firms but only 20% for the oldest – and in technology-intensive, research-heavy industries. In other words, the gap is concentrated precisely where a firm’s value rests not on today’s cash flows but on the option to grow.
The Real Constraint: Scaling
That pattern points to a broad underlying cause related to the scaling up of high potential firms. The valuation gap is largest in the industries where becoming large is most valuable, because scale economies are large. When we rank industries by their returns to scale – how strongly profitability rises with firm size – the US–Europe valuation gap is materially wider in high-scale industries than in low-scale ones. The problem we identify is that European firms are rarely able to turn growth opportunities into reality at the largest scale. We tentatively identify two important frictions, one in product markets and one in finance.
Trapped at Home
The first friction we find evidence for is fragmentation of European markets. This is suggested by a strong connection between firm size and home country market size: a 1% rise in local GDP is associated with a 0.8% rise in a firm’s sales, in tradable sectors and even more in non-tradables. U.S. firms show no such connection to the size of their local economies (the economy of the states where they are headquartered). European firms are, to some extent, national firms, their growth bounded by the size of the home market. This echoes Draghi’s (2024) warnings, and the estimates in Cerdeiro and Rotunno (2026), that internal barriers act like steep tariffs on commerce within Europe.
Starved of Capital
The second friction is related to financing. A common view holds that this financial markets are good enough: if Europe is more bank- and debt-based and the US more equity-based, weaker supply of equity to new firms could be offset by cheap, abundant debt. This substitution argument appears to be false. European firms carry lower leverage than US firms – and the gap has widened since 2008 – so they are not substituting debt for equity.
And above all, Europe is short of the patient, risk-tolerant capital that developing successful new firms requires. In 2023, US venture capital investment reached 0.5% of GDP; even Europe’s most active market, Denmark, managed only 0.15%. The shortfall is starkest at the late stage, when a promising firm needs capital to grow large: the US–Europe venture capital gap widened by $60 billion between 2008 and 2023, driven mostly by late-stage financing. The root is structural. US retirement assets are worth around 153% of GDP and hold substantial equity; most European countries rely on pay-as-you-go pensions, leaving a far smaller pool of long-duration capital of the kind best suited to funding high-growth firms – much as Garnier (2026) and Lerner (2026) describe.
Figure 2 Cost of capital across the size distribution
These frictions bite hardest on the small firms that most depend on outside capital. In Figure 2, we plot the average implied cost of capital for US and European firms across the size distribution. The size premium – the extra cost of capital that small firms pay relative to large ones – is far larger in Europe. The largest European firms face costs of capital similar to their US peers, but the smallest face implied discount rates above 60%, against about 40% for comparable US firms. And the penalty has grown: the European size premium roughly doubled between 2008 and 2020, pulling further away from the US.
What the Valuation Gap Really Captures
Taken together, European firms are hemmed in on two sides. They cannot easily grow beyond local markets, and they cannot easily fund the growth they might otherwise achieve. Both constraints fall hardest on where the option to scale is important – and this is exactly there that the valuation gap is widest.
The two frictions may compound one another. A firm that cannot sell beyond its home market has little reason to raise the capital to scale, and investors have little reason to fund growth that fragmentation will cap. Product market integration for services therefore needs to be combined with financial reforms. This could help European firms take advantage of the business opportunities in the modern era, which are overwhelmingly technology related. These technology-related opportunities are characterised by high initial fixed costs and low marginal costs. They require large scale, and often need to reach that scale quickly for competitive reasons. Even with market integration, the development of such firms necessitates sophisticated pools of risk-bearing venture capital for early stages, and very deep equity markets for later stages. Europe may need financial markets integrated enough that a firm headquartered in Lisbon or Milan can scale across Europe as easily as a Texas firm scales across the US, and a pool of long-term capital – built through funded pensions and a real savings and investment union – deep enough to carry firms through the late-stage financing where Europe falls furthest behind. The $34 trillion gap is not only a measure of firms that are less productive today, but of firms that cannot capitalize on the economic opportunities offered by modern technologies.
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