Three dimensions to Europe’s financing problem

We illustrate our analysis with the cases of the euro zone and France. There are three types of financing difficulties in Europe: L ong-term (even low-risk) financing difficulties , both because the required return on equity (i.e. the discount rate) is high and because a significant portion of household savings consists of short-term savings; Risky financing difficulties , because households have strong demand for safety when it comes to their savings and because if financial intermediaries (banks, insurance companies) bear the financing risk, they have to hold a level of capital that becomes increasingly difficult to obtain and make profitable; Equity financing difficulties , because of households’ demand for safety , like for risky financing, but also because of the small size of pension funds, which naturally largely invest in equities, due to the regulations governing financial intermediaries.