Europe needs to develop equity financing for small firms

European Central Bank executive board member Gertrude Tumpel-Gugerell said Europe needs to develop equity financing for small firms, to help increase Europe's potential growth rate.

"While the useful role of banks in financing small firms should not be discounted, other, equity based forms of finance, may be needed to be further developed to fully exploit Europe's growth potential," she said.

Start ups in Europe tend to be primarily bank financed in Europe and to focus on less innovative and less risky sectors than in the US, she said.

Tumpel-Gugerell said: "We have estimated that 1% more growth could be generated by developing financial markets throughout the EU to the level of the most advanced markets or to that of the US".

She also said there is a consensus that some European equity markets are too small, too fragmented and underdeveloped.

The market capitalisation of continental Europe stock markets has risen to 105% of GDP by 2000, from 8% twenty years earlier, it still lags behind Britain and US, according to Tumpel-Gugerell.

The market capitalisation of Britain is 184% of GDP and of the US 155%, she said.

She said slower growth of equity markets in the euro zone is partly due to different regulatory, legal and tax systems, which act as barriers to a truly unified system.

A fragmented market infrastructure is also an obstacle to development, she said.