Europe Suffers Not So Much from a ‘Flight’ of Savings as from Insufficient Allocation to Equities

The euro area current account balance reached €276 billion in 2025 (1.7% of GDP), following €416 billion in 2024 (2.7% of GDP). This surplus can be understood as the excess of domestic savings over investment. This situation suggests that better mobilisation of European savings could significantly contribute to financing the additional investment recommended in the Draghi Report (2024). This is one of the key challenges of the Savings and Investment Union.

The Euro Area Imports More Portfolio Investment than it Exports, Due to a Large Deficit in Equities

The net balance of portfolio investment flows for the euro area was negative in 2025 (€‑71 billion), as in 2024 (€‑42 billion). In other words, non‑residents invested more in the euro area than residents invested outside it. This result reflects two contrasting dynamics. On the one hand, net flows were inward for equities (a negative balance of €‑280 billion, after €‑151 billion in 2024, including investment fund shares). On the other hand, net flows were outward for debt securities (a positive balance of €209 billion, after €109 billion in 2024).

Beyond cyclical fluctuations, portfolio investment flows show no evidence of a capital ‘flight’ (see Chart 1). Equity flows, close to zero in 2022-2023, resumed in 2024-2025, more on the inflow side than on the outflow side. Debt‑security flows also increased over the period, mainly as outflows, although this movement tended to ease during 2025.

The euro area savings surplus herefore did not take the form of net portfolio investment outflows. It was recycled mainly through foreign direct investment (€183 billion in 2025) and ‘other investment’ (€98 billion, primarily loans from resident banks to the rest of the world).

The Euro Area Net External Equity Position Has Remained Negative Despite the Past Outperformance of US Equity Markets

Analysis of portfolio investment flows must be supplemented by analysis of outstanding positions, valued at market prices and current exchange rates. Over the past decade, equity valuations have risen sharply and have contributed more than flows to changes in net external positions. This is particularly evident in the euro area bilateral net external position vis‑à‑vis the United States: for equity portfolio investment, it moved from a negative balance of nearly -3% of euro‑area GDP in 2015 to a positive balance of around 10% of GDP in 2025, mainly due to the outperformance of US equity markets. Today, US shares account for nearly 60% of euro area residents’ holdings of non‑euro‑area equities.

Nevertheless, as shown in Chart 2, the euro area net international investment position vis‑à‑vis the rest of the world as a whole has remained negative for equities (around -25% of GDP in 2025) and has changed little in recent years. The improvement in the euro area overall net external position-from around -10% of GDP in 2019 to +11% in 2025-has mainly come from portfolio investment in debt securities and from ‘other investment’ (cross-border bank lending).

European Financial Investment Remain Characterized by a Strong Home Bias

Another way to approach the issue is to examine the final destination of euro area residents’ financial investments: the national economy, the rest of the euro area, or the rest of the world.

Euro area households’ financial assets are held mainly through intermediaries-via deposits (around one‑third), investment funds, life insurance and pension funds. Direct holdings of listed shares and debt securities account for less than 10% of household financial assets. It is therefore more relevant to examine, using national financial accounts, the composition of equity and bond holdings across all resident institutional sectors: not only households, but also financial institutions, non‑financial corporations and general government.

The main results of this analysis shown in chart 3 are the following.

First, in the largest euro area economies, residents predominantly hold equities issued by firms from their own country-around 80% in Spain, France and Italy (the domestic share is significantly lower in Germany, possibly reflecting different valuation methods for unlisted shares). This remains true when restricting the analysis to listed shares only, although at lower percentages. There is also little diversification not only outside the euro area but even within it. For example, in France, residents’ total holdings of listed shares are split between 51% issued in France, 15% in the euro area excluding France, and 34% outside the euro area. This indicates a strong home bias, given that France accounts for only around 3-4% of global stock‑market capitalisation and the euro area as a whole for just over 10% (compared with with close to one-half for the United States).

Third, for all categories of securities-and particularly for listed equities-the home bias appears significantly lower when the euro area is considered as a whole than when each of the four major economies is examined in isolation. This difference is, however, misleading. It largely reflects the significant weight within the euro area of international financial centres such as Luxembourg and Ireland, where holdings of securities issued outside the euro area are predominant, especially for listed equities (87% in Ireland and 78% in Luxembourg). Taken together, funds domiciled in these two countries account for 40% of the euro area’s total holdings of securities issued outside the euro area. 

As a result, the statistics shown in Chart 3 substantially underestimate the home bias at the level of the euro area as a whole. For example, if a non-euro-area resident holds US equities through a Luxembourg-domiciled fund, this will be recorded as a holding of non-euro-area securities by euro-area residents. Indeed, the study by Beck and Schmitz shows that investors located outside the euro area account for more than two thirds of the holdings of non-euro-area securities held in the portfolios of Luxembourg and Irish funds.

Conversely, the holding statistics in Chart 3 slightly-though much more marginally-underestimate non-euro-area holdings for the large euro-area countries. For instance, if a French resident holds US equities via a Luxembourg fund, this will appear in the statistics for France as a holding of euro-area securities; nevertheless, it will be correctly recorded as a holding of non-euro-area securities in the statistics for Luxembourg and for the euro area as a whole.

The Primary Challenge for the Savings and Investment Union is to Develop Equity Saving

Based on our calculations using national financial accounts (Chart 4), total equity holdings at end‑2024 by all resident sectors amounted to 160% of GDP in France and 126% in Germany-around two to two‑and‑a‑half times less than in the United States (320% of GDP). The gap is even wider for listed equities alone: 47% of GDP in France and 38% in Germany, compared with 214% in the United States. In other words, the real issue is the insufficient size of European equity savings rather than its geographical allocation.

This situation contributes to the imbalance between domestic savings and investment in the euro area. On the one hand, favouring lower‑return investment vehicles forces households to save more in order to achieve a given return. On the other-and more importantly-scarcer and more expensive equity capital weighs on firms’ investment and innovation. This problem is all the more concerning given that investment profitability in the euro area is itself hampered by the still incomplete integration of goods and services markets, as stressed in the Letta and Draghi reports.

Copyright image : Kirill KUDRYAVTSEV / AFP