Economists trace the widening $34tn US-Europe stock gap to European firms' trouble scaling

Over the 15 years the researchers studied ^[4], the US lead widened by about $31 trillion ^[1]. The 2023 gap is roughly 11 times the 2008 one ^[2]. Spread evenly, that comes to about $2 trillion of added lead a year ^[3]. By Benmelech's account, most of the divergence is recent. He said the U.S. and European stock markets moved roughly in step until about nine years ago ^[5].

The comparison uses market totals. For the US, the researchers added up the market capitalisations of the Nasdaq and the New York Stock Exchange. For Europe, they used every EU country plus the UK, Norway, Iceland and Switzerland, drawing on World Federation of Exchanges and World Bank data ^[6]. They added company-level valuations for 9,117 US firms and 7,015 European ones, along with interest rates and the availability of venture capital ^[7].

The obvious alternative explanation, and one the researchers tested, is that America simply lists more companies. They found the gap was not a result of that ^[9]. Their firm sample points the same way. It holds about 30% more US companies than European ones ^[4], while US companies had come to be worth about 330 percent more than their European counterparts ^[8].

In their account, what remains comes down largely to one factor ^[14]. "We live in an era of economies of scale," Benmelech said. "And European firms cannot scale" ^[10]. European companies once sat near the top of industries such as cars and pharmaceuticals. The new, fast-scaling industries that technology created grew up in places where Europe has not made its mark ^[11]. "The science is definitely there, and the knowledge is there," Benmelech said. "But when it comes to the kind of new technology that is hyperscaling at a rate we haven't seen before, they're lagging behind." ^[12]

For a European board, the two causes the economists name are two separate trade-offs ^[2]. A company whose growth is tethered to its home nation grows at close to that nation's pace. Reaching scale means spending early on revenue from outside it. A company that relies on the region's main form of financing gets money that, in the researchers' account, is less suited to fast expansion. Switching to capital built for speed has costs of its own. The published summary does not say which form of financing the researchers mean, or how they measured the link to home economies. I would not set a funding strategy on this study until the full paper shows both.

The gap took 15 years to build ^[4]. No single company's choices this quarter will move the total. A board settles a narrower question this quarter: which market gets the next expansion budget, and what kind of capital pays for it. In the researchers' account, a firm that keeps its growth tied to its home economy is still subject to the constraint they found behind the $34 trillion gap of 2023 ^[1][2].